Hong Kong’s $150 billion public retirement scheme is expected to allocate more assets to onshore Chinese equities, as China A-shares to be added to a benchmark that widely used by the city’s Mandatory Provident Fund (MPF) managers for mixed asset funds.
From July 2023, the benchmark for MPF mixed asset funds, commonly known as the growth fund, balanced fund, stable growth fund and capital stable fund, will include the FTSE MPF China A hedged index, increasing the number of total investable Hong Kong and Chinese equities in these funds from 322 to 1,060.
The new benchmark will mean China A-shares comprise 20% of the new HK/Mainland China sleeve of the equity allocation in mixed asset funds.
Its track record shows that the sleeve yielded higher 1-year and 3-year annualised returns with similar volatility. On a five-year horizon, the return was slightly lower at 12.7% than the 13.1% of the previous benchmark – but with lower risk.
As of the end of September, assets under management of MPF’s 86 mixed asset funds were about HK$422 billion ($54 billion), accounting for 36% of MPF AUM.
Willis Towers Watson (WTW) and the Hong Kong Investment Funds Association (HKIFA) jointly made change to the benchmark and announced last week.
The change came after the Mandatory Provident Fund Schemes Authority (MPFA) added Shanghai and Shenzhen Stock Exchanges to its approved stock exchange list in November 2020, essentially removing the 10% allocation cap for A-shares. The cap is set on equities listed on nonapproved stock exchanges.
The updated benchmark also recognises that major index providers have started to include onshore Chinese stocks in their emerging market indices as the Chinese capital market continues to open up and improve access for international investors, WTW said in the review paper published last week.
It's not mandatory to follow the benchmark. But in general, MPF industry guidelines set by WTW are widely adopted, local media reported HKIFA’s chief executive officer Sally Wong Chi-ming as saying in a press conference last week.
Many fund managers have told a recent HKIFA survey that they are considering adding A-shares to MPF funds they manage. Thus, WTW believes many will follow the new benchmark.
The change will give slightly more balanced sector exposure in the equity portfolio, with more weight in consumer staples sector (+2.8%), less in consumer discretionary (-2.2%) and financials sector (-1.7%).
The industry, including trustees, have given “positive feedback and support for the new benchmark”, WTW said, adding that it will hold a notice period of 18 months before starting to phase in changes to the benchmark in July 2023 and fully implementing them in April 2024.
“We believe this should allow sufficient time for the industry to implement the new benchmark and prepare relevant communication to their underlying investors. Certain investment managers might need time to set up an Approved Pooled Investment Funds (APIF) building block of China A-shares and allow time for MPFA’s approval,” WTW said in the review paper.
“At present, Hong Kong equity is approximately one third of the overall equity portion in the WTW benchmark. Shifting a small portion from Hong Kong equity to China A can provide the portfolio with more diversifications, as Hong Kong is a matured market with lower growth (and lower potential equity returns) relative to China, and including China A in the MPF mixed asset funds can enhance potential returns to the overall portfolio in the long run,” said Sarah Lu, head of asset allocation, Asia at Manulife Investment Management, a major MPF provider in Hong Kong.
Historically, correlations between China A-shares and major global equity markets have been relatively low, there are diversification benefits by adding China A-shares, Lu said.
“Compared to the Hong Kong equity market, China A is younger but is growing fast and with larger universe, greater breadth and depth. Overall, adding China A in the benchmark is moving in the right direction,” she told AsianInvestor.
Another major MPF manager also welcomes the new benchmark.
“We are open to changes that meet members’ needs and market environment. Funds’ benchmark is one indicator which could help MPF members in the fund selection process, however, members should not forget the key is to understand personal needs, goals and risk appetite level,” said Charlotte Chan, head of distribution, Hong Kong workplace and personal investing at Fidelity International.
“Risks and returns vary between individuals. For example, for older groups or retirees, beating inflation may be one of the key investment goals. As of August 2021, according to Morningstar, the overall MPF return is 4.88% which is higher than inflation level, and MPF has been able to help achieve that investment goal,” Chan told AsianInvestor.