As Hong Kong and mainland China equities underperformed, the Mandatory Provident Fund (MPF) posted its worst overall performance in three years, but experts cite slowing economic growth, Covid uncertainty and tightening monetary policy as main concerns for the coming year.
The growth of total MPF Assets slowed in 2021, with investment losses of HK$4.2 billion compared with the previous year’s gain of HK$117.7 billion.
The main factor contributing to MPF performance was mainland Chinese and Hong Kong equities underperforming compared with its global counterparts, Francis Chung, chair of MPF Ratings told AsianInvestor.
The asset class makes up 23% of MPF’s total assets, and had a 40% relative performance variance relative to US equities last year – the largest dispersion since MPF’s inception in 2000, Chung said.
In the third quarter of 2021, residents leaving Hong Kong withdrew HK$2.6 billion from their accounts, up 52.9% year on year and the largest quarterly amount in three years.
In August, AsianInvestor reported that MPF withdrawals were set to grow as people continue to leave the city. At the time, its population had fallen 1.2%, the biggest decline since records were first kept 60 years ago.
However, Chung believes that the departures will not have a significant effect on MPF performance.
“If one looks at 2021, where despite seeing the first investment losses in three years, the MPF system actually grew for a third successive year due to ongoing MPF contributions,” he said.
“Despite the ongoing effects of Covid, early retirement, cessation of employment and early departures, the MPF system remains robust supported by not mandatory contributions, but also top ups through various voluntary contributions options including the relatively new Tax Deductible Voluntary Contribution (TVC) facility,” he added.
AsianInvestor asked experts how MPF fund managers will be adjusting their portfolio this coming year and the biggest headwinds they are keeping an eye on.
The following responses have been edited for brevity and clarity.
Walt Lau, multi-asset investment specialist
HSBC Asset Management
With many economies now in the expansion phase of the economic cycle, we believe global growth will slow down in the coming quarters amid policy normalisation. Supply-side constraints remain a considerable challenge, with Omicron-related disruptions potentially exacerbating existing supply strains. Inflation volatility will continue in the near-term but medium-term inflation is likely to remain contained.
Upside risks are more apparent in the UK, US and some emerging markets (EMs). The combination of slower growth and higher inflation is a challenge for central banks. However, monetary policy is likely to remain supportive as they prioritise economic recovery. We believe stocks should continue to outperform bonds in the mid-cycle phase. Policy normalisation and a staged rise in bond yields should help value and cyclical parts of the equity market.
It is also important to stress that MPF is a long-term investment, investors should review their portfolio regularly based on their risk tolerance level and investment markets conditions.
George Chow, head of institutions, Hong Kong
T. Rowe Price
Global markets recovered remarkably from the historic pandemic-induced sell-off in 2020. Equity performance was strong in 2021 given earnings strength despite elevated valuation, but near-term outlook is mixed due to moderating economic growth, tightening central banks, and Covid uncertainty. This could have significant ramifications for MPF investors.
Francis Chung, chairman
Frankly speaking “performance” within the MPF system is commonly misunderstood and/or misinterpreted.
Total MPF performance is measured by the weight of assets in various fund categories and, with approximately 23% of MPF’s total assets, the largest MPF asset class is Hong Kong/China equities; an asset class which underperformed its global counterparts significantly last year. Indeed, there was a 40% relative performance variance within the MPF system between HK/China equities and US equities last year which was the widest relative dispersion of returns since MPF’s inception in December 2000.
It is ultimately the members who choose where they wish to invest not the fund managers. The biggest contributor to MPF’s 2021 performance was in the biggest asset class and, as it happens, the asset class which had a difficult 2021 performance year.
The key lesson MPF members can take away from 2021 is the importance of diversification. Had members who favoured equities diversified into global equities they would have had another strong year of returns and there’s no better example of this than the MPFA mandated Default Investment Strategy’s (DIS) Core Accumulation Fund, which has significantly higher exposure to US equities than other balanced options within MPF.
Currently, the MPF has very few market sector funds, but for younger members these may be an attractive opportunity, especially if wrapped in an ETF, where an index is used as the benchmark. Tech, Medicare, Electric Vehicle and Battery, and Water are interesting strategies worth considering.
Ernest Wong, former senior investment advisor
PSI Capital Asia
With high and rising inflation and US Fed heading to normalise monetary policy, bond prices and high valuation stocks are under selling pressure. Portfolio managers could start the year with an underweight position in fixed income assets against equity.
They might take a short duration position and be overweight on floating rate instruments within the fixed income space. Within the equity space, they may be overweight on the financial sector and underweight on the high growth high valuation sectors particularly technology. Over the year, the strategy could be adjusted according to inflation trends and central bank policy stance.
As for the headwinds, I think persistently high inflation, aggressive monetary policy tightening in US, outbreaks of new and more severe variants of Covid-19 virus and geopolitical tension particularly between Western countries and China and Russia could be the key risks to financial market performance.