MPF’s conservative funds need to be rebranded
They’re the second-worst performers but still account for 10 per cent of scheme’s assets
To better safeguard the interests of the 2.5 million employees covered by the Mandatory Provident Fund scheme, the government should abolish the conservative fund or at least rename it to reflect how low the returns can be.
The Mandatory Provident Fund Schemes Authority released a comprehensive report last week on the funds’ performance in their first 15 years.
It was not a surprise to see equity funds the top performer among six types of funds, with an annualised return at 4.1 per cent, followed by mixed-asset funds – which invest in both bonds and equity – with 3.9 per cent. They both beat the average annual inflation rate of 1.8 per cent.
They are also most popular fund choices for local employees, with 41 per cent of the HK$560 billion assets of the MPF invested in equity funds and 38 per cent in mixed-asset funds.
Money market funds, which invest in currencies and cash deposits, ranked bottom with an annualised return of 0.6 per cent. They are also the investment destination of less than 0.5 per cent of MPF assets.
But the third-most-popular fund choice, with 10 per cent of MPF assets, is conservative funds, which only invest in bank deposits. They produced an annualised return of just 0.8 per cent, to be the second-worst-performers of all funds, also trailing bond funds on 2.8 per cent and guarantee funds on 1.3 per cent.
Employees who put their MPF contributions into conservative funds would end up losing out to inflation, along with the 8 per cent who opted for guarantee funds.
The problem here is why are so many people choosing conservative funds? The problem may be that the name appeals to employees who do not want to take risks. The funds were formerly called capital preservation funds but the MPFA feared that might mislead employees to thinking they could guarantee their principal, when that was not the case.
Bond funds, also considered a conservative investment option, account for just 3 per cent of MPF assets. But at least they produced a return that beat inflation.
The government and the MPFA need to look into why employees choose conservative funds and guarantee funds, because they cannot really produce a reasonable return but still represent 18 per cent of all MPF assets.
There may be some employees who like the idea of the guaranteed return offered by guarantee funds and do not mind having a low return.
But for conservative funds, one has to look at why 10 per cent of MPF contributions have been put into the second-lowest return category. They didn’t do much better than money market funds, but account for a much larger slice of MPF assets.
The MPFA should rename conservative funds as bank deposit funds, which is what they are. The funds are invested in bank deposits, which have been getting a return of close to zero in recent years. This would at least lead employees to make wiser investment choices for their MPF contributions.