Mandatory Provident Funds (MPF) in Hong Kong posted an average return of 5.39% in September, recovering from an average loss of 0.44% in August, according to data from Lipper.

Equity funds posted an average return of 8.77%, outperforming all other types of funds in September 2007. In August, this asset class was the worst performer on average.

ôInvestorsÆ appetite for risk strengthened as their perception of higher credit risk was alleviated after the [US Federal Reserve] increased liquidity in the financial markets,ö says Eric Wong, head of Hong Kong research at Lipper.

ôInvestors increased exposure in riskier credits such as emerging markets and high-yield bonds,ö he adds.

Among equity funds, funds that invested in China, Hong Kong, and South Korea delivered the highest average returns of 15.89%, 14.37%, and 12.15%, respectively, last month. All bond funds delivered positive returns.

Wong says funds with exposure to China and Hong Kong shares were bolstered by speculation over imminent massive capital inflows from the mainland through the qualified domestic institutional investors program as well as a new round initial public offerings by ChinaÆs state-owned companies in the Shanghai stock exchange. He notes that the 10 best performing equity funds in September were all China and Hong Kong portfolios.

Equity funds that invest in South Korea were helped by the countryÆs strong economy. Consumer confidence reached a five-year high in the second quarter and the prospects for third-quarter corporate earnings growth are favourable.

Equity funds that invest in Japan were among the worst performers, posting an average return of 2.26%. The sudden resignation of Japanese Prime Minister Shinzo Abe, which created political uncertainty, and a lackluster domestic economic environment were largely to blame for the poor showing of those funds.

September was also a good month in terms of seeing more reductions in MPF fees. Both AIA-JF and Bank Consortium trimmed the management fees of their capital preservation funds on September 1.The reduction ranged from 25 basis points to 75 basis points, lowering the annual management fees of the funds to 1.20% to 1.25%.

HSBC and Manulife also cut their MPF fees previously. Just recently, Fidelity also did the same, cutting its fees by as much as 55.5 basis points.

Hong Kong established the MPF in December 2000. Monthly mandatory contributions from workers and employers are capped at HK$1,000 each.

Average September performance of MPF portfolios, by asset types:

Equity +8.77%
Mixed Assets +5.17%
Guaranteed +1.49%
Bond +1.34%
Money Market +0.23%

Top five MPF equity funds in September, with gain:

Taifook MPF Retirement Fd-HK SAR-A +21.38%
Invesco Strategic MPF S-HK and China Equity-A +17.11%
Fidelity Retirement Master Trust-Hong Kong Equity +16.40%
Manulife Glo Select MPF S-HK Equity +16.19%
ING MPF M T Compre S-HK Equity Pf +16.10%

Bottom five MPF equity funds in September, with gain:

Manulife Glo Select MPF S-Japan Equity +0.85%
Mass MPF Scheme-European Equity +1.17%
BOC-Prudential Easy-Choice MPF S-Japan Equity +1.39%
AIA-JF Premium MPF-Japan Equity +1.79%
AIA-JF MPF Scheme-Japan Equity +1.82%