Hong Kong’s Hospital Authority Provident Fund Scheme (HAPFS) has HK$55 billion ($7.2 billion) under management and offers members a choice of six strategies with different risk profiles.
Heman Wong is the institution’s executive director, responsible for overseeing investments and operations. Prior to joining the Hospital Authority in December 2007, he was treasurer of Hong Kong’s Mandatory Provident Fund Schemes Authority, where he managed the HK$5 billion working capital fund and the HK$1 billion compensation fund.
Wong has also spent 15 years of his career working in treasury operations, including at banking firms Midland Montagu and Wardley.
HAPFS has long used Northern Trust as its only custodian for many years, HSBC is the administrator for its member records, while Invesco does member servicing.
Please check here to watch a video interview with Wong.
Q Please outline your overall investment strategy – target return versus volatility and your broad appetite for risk?
A We run a defined-contribution scheme so we offer various fund choices to members, with six different risk profiles ranging from a pure money-market fund to pure equity.
As for any pension, over the long run we aim to beat local inflation, which has been in the 4%-5% range in recent years.
We have had exceptionally good returns on bond funds: 4.7% annualised return over five years ended March 31. Returns have fallen somewhat due a challenging environment; our bond portfolio returned 0.2% in the year to March 31 and the three-year annualised return has come off to 2.5%.
Q What is your broad allocation?
A As a DC scheme with member choice, 47% of AUM is invested in our growth fund (70% equities/30% bonds) and 33% in the balanced fund (50% equities/50% bonds).
The overall portfolio is about 45% in bonds, 45% in equities and 10% in alternatives – the latter split evenly, with 5% in real estate investment trusts and 5% funds of hedge funds.
Q What’s the equity breakdown?
A We are roughly 26% in Hong Kong/China, and for the rest we go with MSCI market capitalisation with some customisation for individual mandates. The US has had a strong rally for the past three to four years until September 2014, so about half of that 74% is in US stocks.
We like the A-share market still, despite the extreme volatility [since mid-2015]; we have been a very long-term investor. We didn’t cut back our A-share allocation last year and we don’t plan to now. It is around 3.6% of our $4 billion equity portfolio, so we now have about $140 million in Chinese stocks.
Q And for bonds?
A We follow the Barclays Global Aggregate index weighting as a benchmark. As for other debt securities, we have index-linked bonds, high-yield bonds, Hong Kong dollar bonds and renminbi bonds – both offshore and onshore – the latter through our QFII licence.
Q Can you give more details about your alternative assets?
A We have used BlackRock for 10 years and Blackstone for three to four years [for the FoHF portfolio].
The fund-of-funds mandate had a great period until 2008, when it had a terrible year, then it did not do so well versus bonds for a number of years. Then when the bond market started to correct in 2015, it performed much better [in relative terms]. For the first quarter of 2016, it has had fairly poor performance.
But now we see more opportunities for hedge funds to do well, for example due to M&A or interest rate arbitrage.
We considered setting up a customised portfolio investing directly into hedge funds three to four years ago, but we ultimately decided not to.
Q What about illiquid assets like private equity or real estate?
A As a pension fund, we like those assets in terms of investment philosophy, but unfortunately it’s difficult to allocate to them because of members switching between funds.
We did make a private equity investment in 2000, before active switching was allowed in 2003, and have kept it as a residual allocation and not increased it.
Q Do you use exchange-traded funds?
A We don’t buy ETFs because they are too expensive; direct index mandates are a lot cheaper. We have two dedicated passive portfolios – a US equity and a Japan equity mandate, both large-cap stocks. They are maybe 10 times cheaper than ETFs, depending on the AUM size.
But we do allow managers to use a small percentage of ETFs within mandates. For example, if you need to allocate a few million dollars for rebalancing, ETFs may be the best way to lock in a market rate of return over a short time.
Q Have you invested in smart beta?
A Yes, we made our first allocation, of $200 million, this month [in June]. It’s a large-cap, low volatility mandate. This will help us deal with the volatility we expect to see continuing.
Having considered both active and passive, we decided to adopt passive and hence chosen to migrate $200 million out of our Russell 1000 Large Cap [portfolio] to the new mandate. Both are managed by BlackRock.
Look out for the second part of this interview next week.