With the world's financial markets taking a beating last year, retirement funds under the Mandatory Provident Fund (MPF) scheme fared no better, purportedly falling 26 to 30 per cent in one year. Some people had to postpone retirement and some retired people had to go back to work as their nest eggs suffered badly. Overall, the MPF market can be divided into three categories: guaranteed funds with the lowest risks and minimum returns, balanced funds with higher risks and higher returns, and growth funds with the riskiest investments and highest returns. However, despite all these funds suffering losses in the downturn, they have recovered substantially, if not completely, this year. 'Nevertheless, fund managers don't expect much of a return for this year,' says Lau Ka-shi, managing director and chief executive of Bank Consortium Trust. Teresa So, chief financial officer of financial planners General International Agency, has noticed the same with her own MPF fund. 'My associates are relatively young people, aged between 25 and 40. A significant portion of their MPF funds is allocated to growth funds by which they try to earn high yields at high risks,' she says. According to Luzia Hung, chief of pension and group business at AXA Hong Kong, most of its MPF funds had recorded positive one-year returns as of September 30 and had aligned with the market. Global equities picked up in the second quarter of this year, with the Asian markets - excluding Japan - leading the rally on their underlying solid economic fundamentals. Such impressive returns were largely due to the strong sovereign balance sheets and manageable public debt of Asian states. 'Invesco's Strategic MPF Scheme has also benefited from the rebound in investment markets, with our MPF funds delivering respectable performance in the year to date,' says Desmond Ng, chief operating officer for the group in Asia (excluding Japan). He believes employees should not just focus on short-term performance for their retirement investment because securities may rise or fall due to various factors. Since the primary objective of the MPF is accumulating retirement nest eggs in a safe manner, investment strategies should be more conservative than with ordinary retail funds. For example, MPF funds are required to have 30 per cent of their assets in Hong Kong dollars to weather exchange rate risks, but this caps the potential gain from a weaker Hong Kong dollar against other currencies for MPF funds with foreign market exposure. MPF funds' exposure to some developing markets is also limited to help safeguard the retirement assets of employees, said Ng. However, rather than adopting a resolutely conservative approach, Lau suggests incorporating bond funds or mixed asset funds with limited equity exposure. As for the right approach in MPF allocation, two key considerations are balance and diversification. Balance means clients may choose to allocate a portion of their portfolio in secured funds with low returns and the balance in funds with escalated risk and higher return. The choice of balance ranging from 100/0 to 0/100 is an individual's decision based on risk tolerance. Diversification helps spread investments into various industries and markets. 'Over time, it helps minimise risks,' says So. For MPF members still 20 to 30 years away from retirement, they can consider having a higher proportion of equity funds with higher potential returns. They need to review their investment portfolio on a regular basis - at least every two years - so as to check the alignment of their financial goals. With the passage of time, investment horizons will be shorter, and turning middle-aged often makes a person seek more stability. 'Abiding strictly by a ratio for share-based funds and bond fund investment does make sense for a middle-aged employee - that is, a less aggressive approach,' says Ng. For those more geared towards stability, Lau suggests the Hong Kong dollar bond fund, which takes out foreign exchange risks, and the global bond fund, which fluctuates more. Generally, those approaching retirement should take a conservative approach. 'After accomplishing most of a person's goals in life, from owning a property to seeing the children receive a proper education, bond funds are the best instrument to keep the capital safe for the retirement life,' says Ng. Accordingly, they can consider transferring accumulated benefits to funds with less risk to lock profit. However, Ng says age is just one determinant of one's risk profile. 'A 50-year-old movie actor who earns big bucks could have a much lower risk tolerance than a civil servant of the same age. This is because the movie actor's income is much more unstable than the regularly paid civil servant. In this case, the civil servant can take a higher risk to achieve capital appreciation of his MPF assets, while the movie actor should go for a more conservative approach to prepare for his retirement,' he says. Generally speaking, a person who has an investment horizon of 15 years before retiring at 65 can set a higher risk/return profile. 'He may be too conservative if a 50-50 balanced portfolio is maintained, the result of which would prevent him from achieving the full potential of his portfolio,' Ng says. 'Indeed, he can take advantage of the global equity rally this year to automatically increase the equity allocation or seriously consider increasing the equity weighting of the portfolio for a better life after retirement.' However, as he ages, his investment strategy should gradually turn more conservative with less risk taken. So agrees that a conservative approach is better later in life, with preservation of wealth the key objective. If a person approaching retirement gets burned in investments, their wealth will shrink and they may not have the time and opportunity to come back. All experts contacted believe younger people can afford to take more risks in order to earn higher yields. 'Given their flow of income and the time horizon of their investments are sufficiently long, by dollar cost averaging [investing a fixed amount regularly over a period of time], their investment risks are mitigated,' says So. Jason Sadler, managing director of Hong Kong insurance business for HSBC Insurance (Asia), says: 'There is a portion of the Hong Kong public that does not invest for savings [in and out positions on the stock market and speculation]. The majority of MPF members do not do switches or rebalance when necessary. 'It comes down to education. In Australia it took time, as in Singapore when they deregulated. It will take time here, but Hong Kong tends to move quickly. So it won't take a decade, but there won't be a mad rush of people switching in the first 12 months [of the Employee Choice scheme] either.'