The stock market rally that began towards the end of last year enabled the Mandatory Provident Fund (MPF) to post average returns of 8.72 per cent in January and February this year. However, this was on the back of last year's valuations of the 423 investment funds that fell by an average of 8.41 per cent, the MPF's second-worst annual performance since its launch in 2000. 'The strong early 2012 performance can be largely explained by four factors: valuations; declining European 'tail risk'; better economic data out of key countries; and broad central bank easing,' explains Yeung Wing-sze, vice-president of institutional and pension business, JP Morgan Asset Management. 'However, we think it's likely that market volatility will remain high in 2012. 'This year will be driven by the uncertainty emanating from Europe's debt crisis and by the elections in many important countries which represent nearly 50 per cent of global GDP. With global growth relatively fragile, politics and potential policy shifts will likely get heightened market attention.' So, given that the gyrations that have the afflicted the world's financial markets since 2008 may well continue, what decisions should Hong Kong's 2.5 million MPF members make this year about their retirement funds? According to Luk Kim-ping, head of Hong Kong institutional business with FIL Investment Management, it is important to maintain a steady course through even the choppiest waters. 'MPF members shouldn't be afraid of, or try to avoid, short-term market volatility as this may mean losing the opportunity of capturing long-term potential return,' Luk says. 'For those with a longer investment horizon, those who are making higher-risk investments, they should also understand they are investing with a dollar-cost averaging pattern. This means that when markets are down, their regular contributions buy more and bring down the average cost of investing over the long term. It is not advisable to try to time the market, make investment decisions based on short-term market situations or be too influenced by market sentiment.' Luk warns that 'there is no one solution that fits all'. His advice is to always stick to basics and determine asset allocation by your own risk/return profile. Yeung sees her company seizing the opportunities presented by the uncertain climate. 'We are looking to increase rather than decrease risk on a tactical view,' she says. 'Further concerted action by the world's central banks to inject liquidity, further ease monetary policy and maintain an orderly market is likely. If so, this is likely to improve investors' appetite for taking market risk. 'Strategically, we still expect the slow global economic recovery to continue, leading to a prolonged low-interest rate environment. In the near term, MPF members may retain a neutral stock/bond position and look for opportunities to selectively increase equity exposure by investing in the regions with growth potential, such as the Asian markets which we believe will outperform over a longer time horizon. 'This is because the fundamentals of Asian economies and companies remain world class, yet valuations on regional stock markets are not reflecting that fact. 'For members who wish to get exposure to Asia but without equity volatility, they may consider an Asian fixed-income fund. The combination of attractive coupons, the possibility of narrower spreads relative to Treasuries and improving underlying fundamentals, suggest to us the asset class is much more attractive than lower risk but 'expensive' Treasuries.' Eric Wong, head of research at Hong Kong Lipper, agrees that volatility can be a good thing for investors - depending on their strategy and age. 'There are two types of MPF investment strategy,' Wong explains. 'One is dollar-cost averaging and the other is lump sum investing - usually used by a preserved account holder who has moved from one company to another when the two companies use different MPF providers.' Wong believes that for those adopting a dollar-cost averaging strategy, long-term investment is the key to success. 'If they are in their twenties and expect to work for the next 40 years, they should invest in highly volatile MPF funds, like the Equity China Fund or the Equity Hong Kong Fund. But as they move towards retirement, preservation of capital should be his priority. So by the time they are about three years from retirement all their investments should be in low-volatility MPF funds, such as money market or bond funds. 'Regarding lump sum investment, for those with no risk tolerance, no matter how well the market is doing, they should not adopt an aggressive investment strategy. However, if they are an aggressive investor, they can allocate their portfolio to highly volatile MPF funds. 'But even though the S&P 500 has surged above 14,000, it appears to lack the momentum to surge higher. They should wait until the S&P 500 has pulled back by three to six per cent before they redirect some of their money from low-volatility to high-volatility MPFs.'