The Hong Kong Mandatory Provident Fund (MPF) rewarded members who didn’t actively allocate their retirement money to asset class, or market-specific funds in 2023 as its default investment strategy (DIS) funds delivered strong returns alongside foreign equity funds.
DIS funds, with a low-fee nature and diversified investment approach, were one of the best performers that contributed to MPF's first positive annual return in three years in 2023.
That trend is largely expected to continue with DIS, also known as “lazy funds", set to extend its positive returns into 2024 regardless of fund managers.
“We’re confident it will continue to offer long-term value in 2024,” said Francis Chung, chairman of MPF Ratings.
The DIS core accumulation fund produced a 14.8% gain in 2023.
MPF, which is a member’s choice pension scheme for 4.7 million Hong Kong residents, recorded a 3.5%, or HK$37.4 billion return in 2023, marking its first annual gain in three years, according to MPF’s annual results released last week. It is equivalent to HK$8,000 gain per member.
This increased total MPF assets by HK$88.8 billion to HK$1.14 trillion ($145.8 billion) by the end of 2023.
Top performers were US, Japan, and global equity funds, delivering returns from 19.7% up to 24.4%. Following them was the DIS core accumulation fund, which outperformed in 9 out of 12 months to produce a 14.8% annual gain. That's its second-best annual result since inception back in 2017.
The DIS age 65 plus fund also recorded a 7.8% annual return.
DIS uses a diversified investment approach across global equity and bond markets, with a feature of “automatic de-risking” as the member ages. It is also subject to a fee cap of 0.75%, well below the industry average of 1.6%.
The Mandatory Provident Fund Schemes Authority (MPFA) also highlighted DIS’s strong performance in a press release on the annual result.
“For those who have no time or are unfamiliar with investing or managing their MPF may consider choosing the DIS,” an MPFA spokesperson told AsianInvestor, noting the de-risking nature could effectively reduce risk while the fee cap indirectly increases net returns.
CAUTION ON HOME BIAS
On the contrary, Hong Kong and China equity funds were the only asset class that recorded losses to the tune of 13.4% in 2023.
Hong Kong and China equity funds' share in total MPF assets have fallen from a high of 28.9% in 2015 to 18.6% at the end of last year, although remaining the largest single MPF asset class.
It is a result of a downturn in the market and a shift of flows into other asset classes, including a significant portion into DIS funds, whose market share was 9.6% as of the end of 2023, up from 8% compared to a year earlier.
Despite the significant correction in Hong Kong and Chinese stock markets, MPFA Ratings’ Chung warned of the potential risks of adding positions in those markets in 2024.
“While it would be tempting to allocate money into markets that have fallen significantly, this needs to be done in the context of a member’s overall objectives,” he told AsianInvestor.
“Long-term diversified investing is a better investment approach than trying to pick favourable markets and time the best entry points.” he explained.
Echoing Chung’s remarks, MPFA also advised members not to adopt a short-term investment approach such as trying to time the market, stressing that MPF is a long-term investment spanning 40 years.
“Rather than speculating the market, scheme members are advised to review their MPF portfolio regularly and take into consideration factors such as their life stage, financial situation, risk tolerance level, etc., when making the assessment,” the spokesperson said.
Despite Hong Kong and China equity funds’ falling shares in MPF assets, they still have a significant impact on MPF performance in 2024 and beyond given their size, Chung noted.
“If local equities do well, MPF will do well, otherwise the system will have to rely on a collective of asset classes to do well,” he said.
FUNDS TO WATCH
Cooling inflation and possible interest rate cuts in the United States are positive factors that will drive global financial markets in the new year, he noted.
“Fixed income and selective equities do well in such conditions. But as we have seen over the past few years, economic data and sentiment can turn unexpectedly and this makes timing and choosing markets a risk,” he stressed.
Besides the DIS funds, MPFA, as the regulator stipulates fund structure and investment scope, has been expanding fund choices for members, leading to the launch of several new funds in the past few years.
These included funds with an ESG or sustainable investing focus, which are worth watching in 2024. Under improved inflation and rate sentiment, global bond funds might be interesting too, Chung added.
Last year, the government also introduced measures to prioritise MPF investments in a certain proportion of future issuances of government green bonds and infrastructure bonds to provide members with more investment options.
The priority allocation arrangement for green bonds was implemented in June last year, and a similar mechanism is expected for future infrastructure bond issuances, the MPFA spokesperson said.
“The MPFA would continue to strive to provide more diversified and suitable MPF investment options for employees while balancing returns and risks.”