Mandatory Provident Fund (MPF)

MPF’s new low-fee funds lose out during Hong Kong stock market rally

The default funds invest mainly in bonds, meaning they hardly benefited from a 36 per cent surge in the Hang Seng Index in the last year

PUBLISHED : Monday, 14 May, 2018, 7:01am
UPDATED : Monday, 14 May, 2018, 7:00am

New low-fee funds introduced to Hong Kong’s compulsory pension scheme have underperformed in their first year, missing out on a stock market rally that boosted the more traditional investment funds, data shows.

Reforms to the Mandatory Provident Fund (MPF) scheme last April saw the launch of the new default funds as a cheap and simple alternative for employees who did not wish to actively choose how their savings are invested.

Under the new system, each of the 14 MPF providers offers two so-called default investment strategy (DIS) funds with management fees capped at 0.75 per cent, lower than the 1.56 per cent average annual management fee across the 435 investment funds. 

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But the low-fee funds invest mainly in bonds while their counterparts, with a heavier weighting of stocks, have benefited from a 36 per cent surge in the benchmark Hang Seng Index in the last year.

The DIS reform came along at the wrong time, coinciding with the global stock market rally last year
Kenrick Chung, Convoy Financial Services

“The DIS reform came along at the wrong time, coinciding with the global stock market rally last year,” said Kenrick Chung, the director of product management at Convoy Financial Services. “The benchmark Hang Seng Index was the best performing stock market worldwide in the last year.”

The MPF providers’ DIS Age 65 Plus Fund – which adopts a very conservative investment strategy, focusing mainly on global bonds – has returned just 2.82 per cent on average for the 13 months to the end of April, according to data from Convoy. That is lower than the 7.7 per cent generated by the RMB Bond fund and slightly below the average return from global bond funds of 2.86 per cent.

The DIS Core Accumulation Fund, which invests in a combination of stocks and bonds, enjoyed a better average return, of 9.57 per cent, during the same period. However, it still lost out to other MPF mixed-assets funds, which returned 12.23 per cent on average. 

Both types of DIS fund lost out to Hong Kong equity funds, which on average returned almost 30 per cent. China equity funds returned 27.33 per cent and “Asia excluding Japan” equities 23 per cent on average.

Pension Schemes Association chief executive Heman Wong Kwong-ming said: “Hong Kong stock markets outperformed the US by more than 14 per cent last year. Active fund managers can choose to hold more Hong Kong equities, but the DIS funds only track the benchmark index to a limited degree. The performance gap is therefore quite big.”

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But he warned against branding the MPF reforms a failure based on the performance of the new funds in their first year.

“MPF members should realise the value of DIS as a cheaper option and stay invested for the longer term to benefit from the lower fee,” Wong said. 

Elvin Yu, a principal at pension consultancy Goji Consulting, said employees should pay more attention to potential returns than the management fee.

“The gain they can get from an MPF with a higher return could be more important than the saving they get from a low-fee fund,” Yu said.

The Convoy survey showed that only about 2 per cent of MPF contributors were invested in the low-fee DIS funds as of October.

“This shows Hong Kong employees are making a smart choice. They would prefer to pay higher management fees for those MPF funds that can deliver a better investment return for them,” Chung said. 

The MPF, launched in the year 2000, is a compulsory retirement scheme covering 2.8 million employees and self-employed people. Its total assets stood at HK$843.515 billion (US$107.46 billion) at the end of last year.

It has frequently been criticised for poor performance and fees that are higher than comparable overseas markets.

Prior to last year’s sweeping reforms, there were no rules governing how a provider invested contributions from a person who had not specifically chosen how their money should be allocated.