The Mandatory Provident Fund, covering 2.5 million employees in the city, has recorded two consecutive months of losses that have wiped out much of its gains in January.
The 455 investment funds under the retirement scheme reported an average loss of 0.24 per cent in March, after an average loss of 0.58 per cent in February, according to data provider Lipper. This erased a good chunk of the 2.61 per cent gains in January.
With the March performance, the first-quarter MPF returns stand at a modest 1.74 per cent.
It follows strong gains averaging 12.07 per cent last year, which in turn came after average losses of 8.42 per cent in 2011 and average gains of 7.18 per cent in 2010.
Last month's best performers were Japan equity funds, with an average return of 5.85 per cent. Mainland China equity funds fared the worst, with losses of 3.59 per cent. Hong Kong-focused equity funds reported losses of 2.44 per cent. Global equity funds on average returned 0.52 per cent while mixed-asset funds returned 0.01 per cent.
On a quarterly basis, too, Japan equity funds were the best performers, returning 12.92 per cent, followed by pharmaceutical and health equity funds, at 11.48 per cent, and US equity funds, at 9.47 per cent.
The worst performers for the quarter, like last month, were the China equity funds, losing 3.04 per cent on average, followed by Korea equity funds, with losses of 2.41 per cent, and global bond funds, with losses of 1.43 per cent.
"March proved a more difficult month for equities as risks associated with the euro-zone banking system again surfaced at a time when some investors have begun to question the US Federal Reserve's commitment to quantitative easing. This hurt performance of MPF assets," said Mark Konyn, chief executive of Cathay Conning Asset Management.
"The year will be subject to a series of stop-start cycles that will make it difficult to build momentum. However, the overall bias is towards equities, and MPF accounts should benefit from moderate recovery in the US despite a weak Europe and lower growth in China."
Rex Auyeung Pak-kuen, Asia president of US pension and investment fund operator Principal Financial Group, said the markets in China and the US are taking a wait-and-see approach after a good run. In addition to some profit-taking, the recent developments in the euro zone are sending a warning signal to investors, he added.
"Combined with the new leadership change in China, from whom investors are awaiting more direction, all the above factors are creating a more cautious investment mindset," Auyeung said. "While there will always be a certain degree of uncertainty, I do foresee a steady improvement in the Chinese and US markets, which will filter into the Hong Kong market."