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How much has Hong Kong’s pension fund returned in 15 years?

Equity funds ranked top, followed by mixed-asset funds and bond funds

PUBLISHED : Tuesday, 26 January, 2016, 3:23pm
UPDATED : Tuesday, 26 January, 2016, 6:34pm

Hong Kong’s Mandatory Provident Fund, which covers the city’s 2.5 million employees, has reported an annualised rate of return at 3.1 per cent for the 15 years since its establishment, beating inflation and bank deposit interest.

Over the past 15 years, the inflation rate has averaged 1.8 per cent.

At the end of November, the fund’s total assets amounted to HK$590 billion, with a fifth coming from investment returns, according to the Mandatory Provident Fund Schemes Authority (MPFA).

Among various types of funds, equity funds ranked top with an annualised rate of return of 4.1 per cent. Next came mixed-asset funds – which invest in both bonds and stocks – at 3.9 per cent, followed by bond funds at 2.8 per cent.

The annualised rate of return of guarantee funds stood at only 1.3 per cent over the past 15 years, while conservative funds at 0.8 per cent and money market funds at 0.6 per cent – all trailing inflation.

The cumulative return of equities funds for the 15-year period stood at 83 per cent and that of mixed- asset funds at 77.1 per cent, both beating the Hang Seng Index and Tracker Fund which rose 53.77 per cent during the same period.

The rest trailed the Tracker Fund, with bond funds recording a cumulative return of 52.2 per cent, guarantee funds 20.6 per cent, conservative funds 12.9 per cent and money market funds 8.8 per cent.

It was the first time the authority had provided such comprehensive data on investment returns since the launch of the MPF scheme. The pension scheme has been under fire for its high management fees and recurring losses.

MPFA chairman David Wong said employees should take a long-term view of the MPF, pointing out that its compound effect meant the longer the investment, the better the returns.

“MPF is contributed every month and such a regular investment could beat short-term investment volatilities,” he said, adding that it took 40 years, the normal working life of a person, for a retirement scheme to mature.

“The MPF system has been in operation for only 15 years. It’s still in the development stage and is like a teenager whose potential is yet to be fully realised,” he said. “After 40 years, we will start to see comprehensively the benefits that such a system can produce.”

At a monthly contribution rate of HK$1,500 and assumed rate of return of 3 per cent, members can get HK$492,000 in 20 years, HK$540,000 in 30 years and HK$1.389 million in 40 years.

Hong Kong employees’ MPF accounts have a high exposure to equities, with 65 per cent invested in stocks – 38 per cent in Hong Kong stocks and 27 per cent in overseas equities – while 19 per cent of the holdings are in bonds and 16 per cent in cash deposits.

In comparison, the private pension plans in developed OECD countries have 40 per cent in stocks and 60 per cent in bonds or cash.

“Hong Kong investors are more familiar with the stocks and not bonds, which is different from Western markets where bond investment was more common,” Wong said.

He urged investors not to chase the market and switch their funds too often and said they should not change their portfolio due to recent short-term market volatilities.

“Investors may like to buy stocks in a market rally while they may sell stocks amid a market slump,” Wong said. “They may end up buying at the high points and selling at the low time and eventually suffer a loss.”

MPFA non-executive director Philip Tsai said investors should adopt a diversified approach and invest in different assets and markets to reduce their risks.

“I have invested my MPF only in mixed-asset funds which invest in both bonds and stocks,” he said. “The return was about 4 per cent over the past 15 years, which is not bad.”

Wong said the MPF management fee had gone down from 2.1 per cent at its peak to 1.6 per cent. The core funds to be launched at the end of this year, with the fee capped at 0.75 per cent, would put downward pressure on fees for other funds.

Rex Auyeung, the Asia president at Principal Financial Group, a leading MPF provider in the city, said 3.1 per cent was a respectable return in view of the volatility the market has experienced.

“This actually reflects the conservative approach on long-term investment aiming to match or beat inflation,” he said. “Depending on one’s age, it never hurts to act conservative as one gets older. With the market expected to be as volatile as last year, one has to review his or her portfolio regularly to ensure an appropriate asset allocation.”

Hong Kong Investment Fund Association chief executive Sally Wong said the investment market would continue to be volatile.

“However , the MPF is invested for the long term,” she said. “As one is investing on a regular basis, dollar-cost averaging will help you to ride through short-term volatilities.”