Global economic recovery points to year-end MPF gains, say analysts

A global economic recovery means pension-fund savers in Hong Kong can expect end-of-year gains in their equity holdings despite lacklustre performance by the Mandatory Provident Fund last month, said analysts.

Structural reforms in developed economies and a "new investment cycle" in the US would drive markets this year, said Haitong International Securities economist Alexis Garatti.

According to data from mutual fund watcher Lipper, the 448 funds in the city's employee retirement scheme fell on average 0.1 per cent, in virtual lockstep with the Hang Seng Index, which dropped 0.14 per cent.

Year to date, MPF funds on average shed 1.01 per cent, compared with a fall of more than 5 per cent in the index.

Disappointing export data contributed to mainland-focused funds being the worst performing sector, sliding 3.23 per cent last month and 9.27 per cent year to date, while unrest in Ukraine overshadowed the broader markets. By contrast, Korean equities were up 2.69 per cent in April.

The mainland will be a drag on sentiment in the short term given worries about its real estate sector, Garatti said. "We expect over the medium term the Chinese economy to prove this is a viable model and structural reform will be seriously implemented," he said.

An improvement in headline data including unemployment will increase the likelihood of interest-rate rises in the US and Europe as central banks look to cap inflation and prick asset bubbles.

Any rate adjustment is likely to impact fixed income funds and investors should expect "volatility in a range" said Freya Beamish, an economist at Lombard Street Research. The range depends in part on whether future rate rises in Japan and currency account liberalisation in China prompts local investors to change money into US dollars to buy American securities and fixed assets.

The Mandatory Provident Fund Schemes Authority, which oversees the MPF, is holding a consultation to consider ways to upgrade the MPF's operation. One idea is to introduce a core fund that would be a simple investment fund with low management fees for employees who do not have the time or knowledge to choose among the numerous funds.

Another is to scrap a mechanism that allows employers to offset the cost of severance pay against their MPF contributions. A further idea is to provide retirees with more flexibility on how to access their savings once they hit 60 years old.

A 2012 study found the average fund expense ratio in the city was 1.74 per cent.

This was the highest among several markets profiled in the report, including Britain and Singapore. Since 2007, the average fund expense has dropped 17.96 per cent and is now 1.69 per cent, according to data from the MPFA.