Hong Kong pension funds to benchmark against FTSE

Nov 15, 2000

European managers have trumped their North American peers in the fight to use FTSE instead of MSCI as the benchmark for Hong Kong pension funds.

The Hong Kong Investment Fund Association (HKIFA) has decided to use the FTSE All World Index as a benchmark for managers of retirement funds under the city's incoming Mandatory Provident Fund (MPF) scheme, ruffling some North American managers in the rival MSCI camp.

According to presentations made to fund managers by Watson Wyatt and Micropal, who jointly advise the investment fund body on which index to use, roughly half of Hong Kong's indexers track FTSE while the rest chase MSCI. Although the two indexes are similar in many respects, the advisers say the new series of FTSE indices cover more countries and stocks with a higher daily trading volume and lower tracking costs to managers.

Nicholas Leung, an investment consultant with Watson Wyatt, says while FTSE captures about 85% of the investible markets in 49 countries with approximately 2600 stocks, MSCI represents just over 60% of the market capitalization in a similar universe. Furthermore, as MSCI generally has higher annual turnover in constituent stocks, managers have to adjust the weightings of stocks in their portfolios more often to be in line with the index, which leads to increased tracking costs.

But MSCI supporters argue FTSE is favored because Watson Wyatt, the dominant pensions consultant in Hong Kong, has always used the index for its own clients. In the days before the introduction of MPF, employers wanting to provide retirement benefits to their staff usually adopted a defined benefits system referred locally as ORSO (Occupational Retirement Scheme Ordinance). Watson Wyatt is the choice consultant for such schemes and FTSE the consultant's long-standing benchmark.

There is also an Anglo-American rivalry to the great divide on indexes, with UK and European companies in Hong Kong traditionally favoring FTSE and American firms preferring to use MSCI. But while some managers are unhappy with the investment body's decision, some are taking it in strides.

"From an investment manager's point of view, I don't really mind which benchmark we have to use," says one equities manager who has experiences with both US and UK funds. "It doesn't affect my investment strategy. The only time I have to jiggle my investment portfolio is when my benchmark changes from one to another. But if the mandate given to me requires me to benchmark against FTSE from the beginning, it's not a problem."

"I actually think the FTSE has a slightly more methodical way of deciding what stocks to go into the index and of what weightings. The MSCI wasn't that transparent before but since it is now introducing a new stock selection system I think the performance of the two will be eventually more consistent," the manager adds.

Sally Wong, chief executive of HKIFA, declines to comment for this article, saying the decision on using FTSE is yet to be made public in a press conference tomorrow (Thursday).