Active funds can still compete in new MPF core structure

Non-passive and more costly funds can still compete in Hong Kong’s occupational pension scheme, despite an upcoming launch for low-cost default products, says a local fund provider.

The introduction of low cost funds next year, whose fees will be capped at 0.75%, seems to naturally favour index-tracking funds.

But Allianz Global Investors (AGI), an active manager and a player in the city's mandatory provident fund (MPF) market, believes it can maintain a viable market share.

“We are looking at ways in which we can maintain active investment in the core fund for 75 bps, which will involve a fee reduction," says Elvin Yu, head of institutional business. "But we believe that we can subsidise the core fund MPF product from our higher fee products, even though these are already lower than the market average fee."

With its current MPF fund charges averaging 1.15% of a member's total assets per year, compared to the current market average of 1.6%, Yu believes that a bulk of AGI’s investors would still be keen on staying in its non-core funds.

Such funds may be index-hugging in nature but when asked how this would differentiate them from exchange-traded funds, Yu said: "Components would still be active, but we don’t actively overweight the US or underweight Hong Kong, but stick to whatever the benchmark components will be."

Another added-value service that Allianz would consider including into core funds would be a ‘glide path’ investment approach, where the asset mix becomes more conservative as the scheme owner grows older.

“Generally, [core fund scheme owners] are people who have less knowledge of investment and they may have less control of their wealth plan, so having a glide path to help them de-risk is actually a not bad idea,” explains Yu.

Up to a third of Hong Kong’s MPF providers could close or merge with rivals as a result of the narrowing margins on MPF business, say industry players. Local and smaller fund providers are expected to be worst hit by rules imposing a fee cap of 0.75%. Standard Chartered has already put its Hong Kong pensions business up for sale.

Although meeting a core fund at a fee of 75 basis points will be challenging and profits will “definitely” be lower, said Yu, he insisted that AGI’s approach highlights two points, a commitment to MPF market and the case for active investment.

“We’d rather find ways to maintain our active approach, even within that fee cap, so we believe that active investing can also add value to core fund members,” says Yu.

"It’s a matter of how a scheme sponsor approaches it. Some people will say they can do it with purely passive ETFs, because of relatively low fees. They will simply structure the allocation according to whatever eventual guidelines are provided (by the MPFA) and play passively. But that will mean no added value add and no extra service," Yu adds.