DIS fund could lower Mandatory Provident Fund fees, says BlackRock

Across Hong Kong, 630,000 MPF employees were yet to make any investment choices of their own, as of January, a figure worth HK$11 billion

PUBLISHED : Monday, 20 March, 2017, 9:17am
UPDATED : Monday, 20 March, 2017, 9:17am

The Default Investment Strategy (DIS), or the “core fund” to be launched on April 1, could be set to lower the fees of Hong Kong’s Mandatory Provident Fund (MPF), and increase investors’ interest in passive asset management, according to BlackRock, considered the world’s largest asset manager.

“If the DIS assets under management grow to a certain level, we certainly have the ability to lower our fees. But we can’t promise that partners will ultimately make their fees lower [than the cap of 0.95 per cent],” Julia Lee Siu-lie, BlackRock’s head of Hong Kong retail business, told the South China Morning Post.

BlackRock offers two funds that passively track the FTSE MPF All-World Index and Citi MPF World Government Bond Index respectively, which are used as the two benchmarks to measure the performance of the DIS funds, where the capital of Hong Kong employees, who never take action to manage their MPF accounts, will be invested.

MPF providers need to explain to the authorities if the DIS fund performance is more than 2.5 per cent higher or lower, compared with the two benchmarks’ performance.

Three of Hong Kong’s 18 MPF providers are partnering with BlackRock to offer DIS funds that passively track the two benchmarks, Lee said, adding that the three players have decent market shares.

The passively managed DIS funds – which adjusts their exposure to equities or bonds by employees’ age – provide diversified global-wide asset allocation, with lower cost, lower risk and more transparency to investors, Lee said.

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“Hong Kong investors have strong home bias, but MPF’s Hong Kong equity funds recorded a 1.1 per cent return last year, meanwhile there are more than 1 per cent fees,” she said.

It is required that the maximum management fee for the DIS fund is 0.75 per cent of the value of the funds on a yearly basis, while the recurrent operational expense is capped at 0.2 per cent.

The total maximum cost of 0.95 per cent compares to an average of 1.6 to 1.7 per cent expenses among existing MPF products.

If the passively tracked funds report good performance with lower cost, there will also be more pressure for MPF providers to lower their fees of actively managed schemes, Lee said.

If the DIS asset under management grows to a certain level, we certainly have the ability to lower our fees. But we can’t promise that partners will ultimately make their fees lower [than the cap of 0.95 per cent]
Julia Lee, BlackRock’s head of Hong Kong retail business

“I am confident the DIS will increase people’s understanding and acceptance of passive investment. Pension funds and institutional funds in Europe and the US have already put a bulk of money in index funds,” Lee said.

Across Hong Kong, 630,000 MPF employees were yet to make any investment choices of their own, as of January, a figure worth HK$11 billion, down from 1.05 million accounts valued at HK$18 billion in November, Mandatory Provident Fund Schemes Authority executive director and chief corporate affairs officer Cheng Yan-chee told its annual media briefing.

That capital is set to flow into the DIS soon, but there are concerns that the US rate-rise cycle may lead to poor performance of the Citi index, which has large exposure to US and European government bonds.

“Hong Kong employees need to look at the longer trend, rather than short-term performance of the two benchmarks,” Lee said, adding that the DIS adjusts risk exposure along with employee’s life path.

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