Guess again if you think the MPF has outperformed inflation

Statistics that show the Mandatory Provident Fund outpacing inflation shouldn’t be trusted

PUBLISHED : Monday, 12 February, 2018, 7:04pm
UPDATED : Monday, 12 February, 2018, 11:54pm

Hong Kong’s Mandatory Provident Fund reported a 4.8 per cent annualised net return in the 17 years since its launch, beating inflation of 1.8 per cent over the same period, the city’s pension regulator said yesterday.

SCMP, February 9

There are some things that these MPF people forgot to mention in their little outbreak of chest-beating. We shall start with one of the more obvious ones.

The first chart reminds you (some people need reminding) that from mid-1998 we went through a seven-year period of deflation. The MPF opened for business in December 2000, during this deflation episode. Only seven years later did the consumer price index again rise to where it had stood at that time.

Thus do not be impressed by this boast that the MPF’s annualised net return since its launch has been so much in excess of inflation. The difference is only evidence of an anomaly in the inflation figures.

But I am not sure anyway quite what a 4.8 per cent annualised return means in the context of the MPF. For instance, are the initial performance figures, when the total net asset value was less than a fiftieth of the present value, given the same weight as the performance today? Have adjustments been made for the profit element of the benefits paid over the period?

There are a thousand ways of playing jiggery with fund performance numbers. That’s how your personal investment adviser (if you’re fool enough to rely on one) can always supply a glowing report on himself.

The second chart gives you my own assessment of MPF performance relative to inflation. It starts from September, 2004, near the bottom of the deflationary episode, and is the first date for which the MPF has published quarterly numbers on contributions and benefits paid.

What I have done here is take total MPF net assets at that date, HK$107.8 billion (US$13.78 billion), and then add to it every quarter the total of contributions for that quarter less the benefits paid. This gives you the contribution base of the MPF net asset value and it is represented by the blue line on the chart.

Then we get the red line. This is the reported net asset value, up and down with the performance of securities markets over the period.

And now to the yellow line. This is the blue line on the contribution base adjusted for consumer price inflation over the period.

What you now see is that the MPF’s net asset value has done little more than keep up with inflation since we started having inflation again and, in fact, only exceeded it in the last quarter of last year. It has probably dipped under it again by now with the latest market corrections.

I am not really surprised by this tepid performance given that the management fees the government has allowed the sharks who actually manage the money has been only a tad less over the period than the MPF’s vaunted (and dubious) 1.8 per cent inflation figure. It is a lead weight on performance.

What I also have not showed you (because the line goes too far off the chart) is that you would have done about twice as well as the MPF net asset value if all your contributions, with re-invested dividends, had simply gone into the Hang Seng Index.

Nice hollow sound there, Tarzan.