Fund's positive returns surprise sceptics

Track record over four years should encourage overcautious to think again about their low-risk investment strategy

FOLLOWING ITS inauspicious launch into a post-bubble bear market, the Mandatory Provident Fund (MPF) has, on the whole, performed well over its four-year life. The returns performance from most providers and across fund choices has been broadly positive.

According to figures from fund data provider Lipper, returns for the MPF as a whole have been 10.39 per cent since its launch in December 2000 and 10.27 per cent over the past year, as at November 30.

Top performing sectors since the launch have been equity funds, with Asia ex-Japan equity, Hong Kong equity and Japan equity delivering 28.37 per cent, 27.41 per cent and 26.49 per cent returns, respectively.

The best performers over the past year have been Hong Kong equity, Japan equity and European equity, which produced 21.76 per cent, 19.62 per cent and 19.43 per cent returns, respectively.

Figures from consultancy Watson Wyatt showed performance from different lifestyle categories have been in line with expectations. Funds with higher equity content have performed better than those with lower equity content.

Over the three years to the end of the third quarter of this year, the median return for growth funds, balanced funds and capital preservation funds has been 9 per cent, 7.9 per cent and 6.6 per cent, respectively.

These generally positive returns may come as a surprise to the many investors who showed little interest in the MPF when it launched, or who lost interest as their initial contributions shrank in the equity market downturn.

The four-year track record should provide many initially over-cautious investors with food for thought and an impetus to switch to more aggressive funds.

The recovery of equity-focused funds illustrates the important concept of dollar-cost averaging in long-term investing.

With regular and fixed monthly contributions, the investor is buying fund units regardless of whether markets are high or low. So when markets are down and prices are low, the regular monthly contribution buys more units, which then boost performance during a market recovery. Over time, volatility is smoothed and the average price paid for fund units is lowered.

Sally Wong, executive director of the Hong Kong Investment Funds Association, said members who were previously unaware of dollar-cost averaging had started to understand it and even applied it outside their MPF investments.

'[For people], who are not sure when to enter or exit the market [and] tend to fall into the trap of buying high and selling low, the appeal of dollar-cost averaging is particularly great. It helps them reduce the regret risks and especially the risk of wrongly timing the market. They find it helps to smooth out short-term market volatilities.'

Underperformance is a serious but often ignored risk in long-term investment. MPF members with long investment horizons and higher risk tolerance should think about switching out of guaranteed or capital preservation funds and into equities.

'Equity funds may be more volatile than many other categories in the short run, but someone in their mid-20s should not shy away from this higher level of risk,' Ms Wong said.

'What is important is for them to leverage the time frame to come up with a strategy that will beat salary and price inflation - which is the key enemy - over the long run. Based on historical data, [equities] have a greater probability to help him achieve this over 20 to 30 years.'

Karen Chan, research manager at Lipper Asia, said equity funds would not be suitable for everyone and discouraged investors from simply switching to high-flying funds or sectors.

'We generally do not encourage investors to chase hot markets or sectors, or to put all their eggs in one basket; and we don't encourage investors to over-concentrate their portfolio investments. The bottom line for them is to diversify and think long term, to review asset allocations and to understand their risk-appetite to create a strategy that fits their objectives and needs.'

She said a balanced portfolio, which diversifies investments across geographical areas and asset classes, was still the smart choice for many investors.

Interest in the MPF appears to be rising, evidenced by growing numbers of inquiries to call centres and via the internet.

Ms Wong said: 'In the past, the attitude of the public towards the MPF was lethargic. As the performance of the global equity markets has improved since the second half of last year and the member account balances have increased, interest in how the MPF funds perform has risen.'

Higher job turnover in an improving economy means employees face choices about whether to transfer their MPF benefits to their new employer or keep them in the existing scheme.

MPF members will benefit from the introduction of the Code on Disclosure, which will be implemented in phases. And, with more than three years of performance figures available, the industry should also start to provide figures for standard deviation, which shows the volatility of a fund.

Ms Wong urged MPF members to make full use of the information already available to them.

'One area that many employees overlook is the annual member benefit statement, which is provided within three months of each financial period.

'To protect one's interests, it's important to scrutinise this statement, which contains inter alia, total contributions made within the period, beginning and closing balances, and the amount transferred in and out,' Ms Wong said.