The Mandatory Provident Fund (MPF) is a compulsory pension fund designed by the Hong Kong government as a major protection scheme for the aged and retired residents. Most employees and their employers are required to contribute monthly.
How to get the best MPF funds
Returns on MPF funds vary widely and finding a good provider can be a minefield, says Jasper Moiseiwitsch
Thinking about changing your MPF plan? The recently implemented portability scheme gives you some freedom to move. And, as you search through fund data, you will notice there is much to choose from. Funds can vary greatly in terms of their returns, fees and risks.
This article looks at the best performing MPF funds and attempts to explain why there is such steep variance in performance. For those shopping around for a new fund, an excellent starting place is the website of the Hong Kong Investment Funds Association (hkifa.org.hk). The non-profit body represents the fund management industry in Hong Kong, and the website puts out a monthly ranking of MPF funds.
Lipper, a data firm owned by Thomson Reuters, does the ranking, comparing funds within their peer group using three criteria: total returns, consistency of returns and capital preservation. For example, it puts together all the Hong Kong equity funds in MPF, and measures which funds score highest for total returns (dividends, interest and capital gains). Returns are net of fees, which addresses a key complaint about MPF - high fees.
It also looks at the consistency of returns to ensure gains are more or less regular, month to month. This is an indicator of a fund's stability and ability to manage risk. The more regular, the better. Lipper also ranks funds on their ability to protect capital and to protect investors from big one-off losses.
The last two criteria (consistency and preservation) measure a fund's defensiveness or risk aversion, while the first (returns) is a measure of potential rewards. Money Post collated the Lipper data for the most recent month of review (September) to find the top funds for the main categories (see second table below).
Where a fund is labelled a "Leader", it is the top fund of that group. Otherwise, Lipper ranks funds from one to five, five being the best rating. A second table looks at returns within main fund categories (see table below).
Returns can be highly variable. For example, Sun Life's Hong Kong equities fund generated the highest five-year returns among its peers, returning 17.44 per cent. The second best Hong Kong equities fund, from RCM, returned 2.17 per cent over the same period, according to Lipper.
The best performing guaranteed fund returned almost double the amount returned by the fifth best fund in that ranking Much of this variance is explained by the fact that most (95 per cent) of MPF funds are actively managed. This means the funds involve managers who actively pick investments.
This is in contrast with the other common style of investment, which is for managers to passively track a benchmark; for instance, the Hang Seng Index. For example, it's notable that MPF involves no exchange traded funds (ETFs), a point made by Stephen Vines in last week's Money Post. ("Half-baked reforms will satisfy few".)
Hongkongers who want an ETF style of investment can find a handful of index-tracking funds in MPF, such as HSBC's Supertrust Hang Seng Index Tracking Fund. However, note how much more expensive these MPF plans are compared with ETFs.
HSBC's Supertrust Hang Seng Index Tracking Fund involves an expense ratio of 1.38 per cent, according to the MPF Schemes Authority, a regulator. The Tracker Fund of Hong Kong, which also tracks the Hang Seng Index, estimates its total fees at 0.15 per cent per annum. It's the exact same exposure as the HSBC fund, for one-ninth the expense.
The difference is that MPF plans involve their own costs, particularly administrative charges, and fees to MPF providers. Administrative charges go to the cost of tracking each individual's contributions, their returns and all the other MPF minutiae. Fund providers pay a fee of 0.5 per cent to 0.6 per cent to MPF administrators, according to Belinda Luk Kwai-sim, senior vice-president, pensions and group business, Sun Life Hong Kong.
Luk adds that fund providers take about 0.6 per cent more of the total fee to cover their marketing work, costs of managing call centres, customer websites, and the rest. These two charges (admin and provider commissions) make up most of MPF funds' total expense, which average 1.74 per cent per year.
MPF users pay for all these charges as part of the total expense of their funds. The government constantly pressures the parties involved (fund managers, trustees, administrators and custodians) to lower their fees.
"Whatever new MPF funds we offer have to be at a lower fee. You cannot go up; you have come down. It [this pressure] is coming from all angles, including the government - the message is loud and clear," says Sun Life's Luk.
The point is that while MPF funds do involve high fees, it is not because a greedy industry is overcharging. The fees are higher because Hong Kong's MPF system, with its patchwork of hundreds of funds, and dozens of trustees and fund providers, is extraordinarily bureaucratic and administratively intensive. Also, because the plan is fully in the hands of the private sector that competes for funds, MPF is marketing intensive, creating costs that are ultimately paid by users.
These fees leave users frustrated, they perceive service standards as poor and fees too high (see sidebar). Which goes back to the point about the heavy tendency for MPF fund providers to only offer actively managed funds. It is easier for providers to justify high fees with actively managed funds than with passively managed tracking funds.
Simply put, those providers who offer index-tracking funds in MPF risk an unfavourable comparison on index-tracking funds, particularly low-fee ETFs.
"The management fee on ETFs is low, so many of the providers do not want [to offer the instrument]. It's a profit issue. They can't charge a high ETF fee, because users would see other ETFs in the market that charge a low fee," says Wyman Leung, the director of investment services at Altruist Financial, an advisory firm. "If you charged a high fee it would arouse discontent,"
Luk says that in more mature markets, such as the United States or Australia, funds largely track indexes. Fund managers tend to repeat strategies and holdings. Funds are largely interchangeable, and providers compete mostly to offer the lowest fee.
The MPF Schemes Authority says it is pressuring providers to offer more index-tracking funds.
When screening funds, it makes applicants give reasons for not choosing an index-tracking strategy to achieve the same investment exposure, says the regulator.
But in the meantime, Hong Kong's MPF funds are overwhelmingly managed, and funds largely compete for users based on their track record of generating returns, and returns can vary greatly.
So, MPF fund selection matters, but it's a minefield.
Tracks returns of MPF funds from some of the biggest fund providers.
Excellent data on fees.
Provides monthly ranking of best MPF funds.