Returns of the 456 investment funds under the Mandatory Provident Fund grew 8.09 per cent last year, according to data provider Lipper. Although that fell short of the retirement funds' 12.07 per cent returns in 2012, the performance was far better than the 2.6 per cent gain in the Hang Seng Index last year. Under the MPF scheme, which covers 2.4 million people in Hong Kong, employees can choose how to allocate their part of the retirement contribution among different funds. Those who chose funds focusing on Japan and US equities benefited the most last year. Japanese equity funds led with a return of 32.83 per cent, followed by pharmaceutical and health funds, at 31.62 per cent, and US equity funds, which returned an average of 30.13 per cent. Bond funds had a bad year. The worst performers were Hong Kong dollar bond funds, which lost 3.42 per cent, followed by global bond funds, with a loss of 2.49 per cent. South Korean equity funds also reported a 0.72 per cent loss. Mixed-asset funds, the most popular choice, returned 10.9 per cent on average. Mark Konyn, the chief executive of Cathay Conning Asset Management, said the MPF performed reasonably well last year, but he warned of challenges ahead. "Bond funds and bonds generally had a more difficult time as longer-term yields in the United States expanded in response to the Federal Reserve's announcement that it would taper its bond-buying programme. Managers have been reducing exposure to longer-dated bonds as a consequence." Principal Financial's Asia president Rex Auyeung Pak-kuen said he expected more market volatility this year. "While the US market will continue to grow due to positive corporate results, it would be a challenge to maintain the same magnitude [as last year], with an expected interest rate movement in sight," he said. "Japan is a wild card and this year will prove if its fiscal policy is sustainable." Elvin Yu, the managing director and head of institutional business in Hong Kong for Allianz Global Investors, said he believed equities would still outperform bonds this year. "US corporate earnings are good while the yen will continue to be weak. European markets are recovering. These would support equities in the US, Japan and Europe this year, although the growth rate may not be as strong," Yu said. "Bond markets would continue to have a tough time. Conservative investors may consider yuan money-market funds."