Mandatory Provident Fund (MPF)

Hong Kong’s MPF reports 1.26 per cent gain in 2016

The compulsory pension scheme recovers from loss in 2015 to beat the Hang Seng Index and bank deposits but analysts warn of risks in year ahead

PUBLISHED : Wednesday, 04 January, 2017, 7:38pm
UPDATED : Wednesday, 04 January, 2017, 11:29pm

Hong Kong’s Mandatory Provident Fund generated average gains of 1.26 per cent in 2016, beating the benchmark Hang Seng Index and bank deposit rates, according to data from Thomson Reuters Lipper.

The return represents a turnaround from the previous year’s 3.1 per cent loss and is better than the Hang Seng’s 0.4 per cent gain and the local bank deposit rate, which is close to zero.

However, it falls short of the gains seen in 2012, 2013 and 2014, which were 12.43 per cent, 8 per cent and 1.68 per cent respectively, according to Thomson Reuters.

Rex Auyeung, the president for Asia at Principal Financial Group, a leading MPF provider in the city, said the overall return last year was reasonable in light of the volatility in markets resulting from surprise events such as the Brexit vote, the devaluation of the yuan and Donald Trump’s success in the US presidential election.

“While it is not a return that one would jump up and down to celebrate, it is a reasonable return in view of many events we witnessed,” Auyeung said.

The compulsory retirement pension scheme covers Hong Kong’s 2.8 million employees and self-employed workers, and has 435 investment funds which invest in stocks, bonds, and currency according to the employees’ choices.

The biggest loser of 2016 was a Korean equity fund which fell 12.53 per cent despite the South Korean benchmarket Kospi index advancing 3.32 per cent last year. The same fund was 2015’s best MPF performer with a return of 21.56 per cent.

Health care equity funds were the second worst performers with losses of 7.31 per cent, while yuan-denominated bond funds were the third worst, dropping 2.51 per cent.

The poor performance of yuan bonds was related to the 7 per cent slide in onshore yuan against the US dollar last year, the biggest annual fall since records started in 1994.

The biggest winner was a single equity fund that returned 12.75 per cent. In second place was the category of US equity funds, gaining an average of 8.17 per cent, though that was below the benchmark Dow Jones Industrial Average which was up 13.4 per cent last year.

The next best category was Asia Pacific (excluding Japan) funds, which saw average returns of 4.19 per cent.

Mixed asset funds, the most popular MPF choices which invest in bonds and equities, returned 1.82 per cent last year.

Auyeung said: “Going into 2017, caution will be a good approach for investors, with the expected interest rate increase and other geopolitical developments. The closer you are to retirement, the more conservative approach you should take.”

The MPF in April this year is set to undergo its largest overhaul since its introduction in 2000. The reform will require all MPF providers to provide a low fee fund called a default investment strategy fund (formerly known as a core fund) which has simple investment strategy and will cap the annual fee at 0.75 per cent. This is lower than the current average fee of about 1.5 per cent.