Hong Kong's Mandatory Provident Fund (MPF) schemes have made a promising start to the year, and the outlook for 2002 looks good, according to a Standard & Poor's (S&P) Fund Services analysis. The average return produced by MPF funds in the first quarter of this year was 0.41 per cent, a sharp increase from the minus 6.88 per cent registered by the funds in the same period last year, the S&P report said. 'We will continue to see improvement in the MPF funds. MPF funds have, in general, shown substantial improvement over the course of this quarter,' said William Reidy, managing director for Standard & Poor's Fund Services in Asia-Pacific. For the whole of last year, MPF funds lost 8.17 per cent. Of the 255 core funds, 144 gave a positive return in the first quarter, compared with just 77 funds in the same period last year. 'The results were fairly consistent based on the underlying improvements in the wide global economies, particularly in the Asian equity stock markets,' Mr Reidy said. 'There is a greater certainty and clarity this quarter and an improvement in the Asian exports.' Low-risk money market funds remained the most rewarding in the present uncertain market environment, growing 0.09 per cent in the first quarter. Since MPF inception at the end of January last year, these funds have grown by 2.01 per cent. Balanced funds, which invest more than 30 per cent of their portfolio in equities, also made a gain in the first quarter, of 0.02 per cent, but have shed 2.62 per cent over the past 12 months. 'Funds heavy on equity will continue to perform this year because the market is picking up, especially towards the latter half . . . Those funds heavy on bonds and guaranteed funds will not show much improvement,' Celestial Asia Securities research head Herbert Lau Chung-kwan said. Strategists have been quite bullish on Asian equities, most of which have made substantial gains as a result of the improving United States economy and a rise in exports. Thus MPF funds investing solely in equities have shown good returns in the first quarter. Kingsway's Korea A fund, which invests in Korean equities, reaped a 24.24 per cent gain in the first quarter, while funds investing in Hong Kong equities performed below par, losing 1.96 per cent for the quarter. 'In the year to date, Hong Kong has been a challenging market. Many of the major vendor ratings organisations are still underweighting Hong Kong, including ourselves,' Mr Reidy said. 'However, on a positive note, the retail figures have shown improvement and we might end up seeing Hong Kong as one of the dark horses of 2002, when opportunity becomes quite significant in the latter half.' He added that the fixed-income category had not performed well as there were concerns about the interest-rate environment. Simon Rudolph, executive vice-president of global equity management at Templeton, said: 'We have had pretty positive performances in equities since the fourth quarter. However, my concern going into this year, is that the move in the equities market in the last quarter has been too quick. We are not sure if we are going to get a sustained corporate turnaround quickly.' At the back of gains in equities, the safe haven of fixed-income and defensive funds registered negative returns in the first quarter. Less than 30 per cent of these funds' portfolios are in equity. The fixed-income funds lost 0.36 per cent in the first quarter but accumulated a total gain of 1.46 per cent since inception in January last year. The funds were expected to underperform for the year as the US Federal Reserve was poised to raise interest rates in an effort to curb runaway economic growth, said King Au, head of client investment services at HSBC Asset Management. Defensive funds, with an equity component of less than 30 per cent but invested in a variety of investment products, lost 0.26 per cent in the quarter, and are down 4.97 per cent since inception. Mr Au said fixed-income and equity funds were expected to produce a low single-digit and high single-digit average growth respectively this year. Fund managers had mixed views on the performance of MPF funds for the year. 'I really do think it will be a volatile ride, there is still uncertainty in the interest rates and there are concerns whether recovery [of the US economy] is going to be strong or weak,' Mr Rudolph said. According to investment managers, the second quarter and the rest of the year will be volatile, with all eyes focused on the magnitude of the expected interest-rate increases in the US as well as the outcome of corporate earnings. 'You should have a balanced portfolio, whether geographically or sector wise. It is a very difficult period for managers,' Mr Rudolph said. Mr Reidy said he did not expect investors to switch MPF funds this year despite a shift in performing funds, from fixed income to equity, due to the long-term view of the pension fund schemes.