The wide divergence of performance by equity funds, which is the largest category of investments, by Hong Kong’s Mandatory Provident Fund (MPF) scheme has been raised as a serious concern by a local research firm.

MPF Ratings, which analyses the territory’s MPF schemes for the benefit of members, said the mixing of Hong Kong and mainland China focused funds, including active and passive funds, is likely to cause confusion and potential financial loss for scheme members.

Francis Chung,
MPF Ratings

According to data from MPF Ratings, the median difference between active and passive funds within Hong Kong/China equities, MPF’s largest fund category, so far in 2020 (to September 10) is 19.78%.

“Over a 10 year period and most other timeframes, passive funds produced better outcomes, but when you add the differential for 2020 the dynamic reverses,” MPF Ratings chairman, Francis Chung, told AsianInvestor.

“The performance variation magnitude is staggering. The underperformance of passive funds in 2020 has been so extreme that the long term benefits of investing passively have been completely decimated.”

The heightened market volatility in 2020 has given active managers in global equities the opportunity to perform better in real time than more passive index tracking funds. But according to Chung, "the thing that MPF members won’t see is that that Hong Kong/China equity category mixes in Hang Seng Index funds with mainland China funds, active funds with passive funds."

Chart: Cumulative Value of Median Equity Fund (Active vs. Passive; Dec 2009 to Sept 2020)

Source: MPF Ratings

Aleksey Mironenko, global head of investment solutions at Hong Kong wealth advisory firm Capital Group, told AsianInvestor there is indeed a degree of confusion in the sector.

“It’s important to understand that the passive options offered in that bucket within MPF are currently only the Hang Seng Index. Whereas the active funds for the most part are allowed to buy stocks outside the HSI, including China stocks. Remember HSI only started adding Tencent/Alibaba quite recently."

Chung added, "The HSI MPF fund will be very different from the FTSE MPF China fund, for example. So you have a category that is quite diverse, but from a MPF member perspective, they don’t understand those nuances. And there’s always the risk they’ll just go for the lowest cost fund."

"It begs the question, is Hong Kong/China really Hong Kong/China within MPF."

AsianInvestor asked the Mandatory Provident Fund Schemes Authority (MPFA) to comment on whether they see this as an issue that needs addressing. "Other than reviewing investment objectives and policies of MPF Funds for better understanding of their risk and return profiles, scheme members should also review the fees and charges of the MPF funds," said a spokesman.

Mironenko said Chung is perhaps right to say that the index options available in MPF for Hong Kong stocks may well be inferior, but that is due to the choice by MPF providers and the regulations limiting what kind of funds can be added. 

MPFA pointed out that there are other index tracking Hong Kong equity MPF funds available, other than those tracking the HSI - "funds tracking FTSE MPF Hong Kong Index and CSI HK 100 Index delivered returns of more than 11% for the past 1 year," said the spokesman, adding that "the range of MPF products offered in MPF is highly market driven".

ACTIVE UNDERPERFORMANCE

In any case, Chung’s assertion about the underperformance of passive funds glosses over the fact that active managers do not, over any long term measure, outperform consistently.

“The stock return dispersion in global equity indices rocketed to historic highs during this volatile period, providing a fertile ground for stock picking. However, data shows that the majority of active fund managers failed to capture this opportunity,” said Priscilla Luk, head of global index research for APAC at S&P Dow Jones Indices.

Chung acknowledged that, for pension savers especially, the advantage of passive investment is allowing investors to ride the peaks and troughs and benefit from the proven benefits of 'time in the market'.

"Arguably from a member’s perspective, it’s not a question of passive versus active – it’s really whether MPF members who have invested in Hong Kong/China equities truly understand what they’ve bought.

"The lesson this shocking performance differential should teach MPF members is that like asset classes, no one investment approach works all the time, so it’s important to diversify not only the assets one invests in, but also by investment style.”

He said the most encouraging trend is seeing increasing fund flows into the default investment scheme (DIS).

"It’s not newsworthy but it shows that people, when they don’t know what decision to make, are taking the default option which is at least diversified."

The biggest mistake they can make, he said, it is to try to utilise the long term investing advantage provided by MPF and be tempted to time markets. "I don’t think that message gets put out enough."

Breakdown of Constituents of Hong Kong/China MPF Fund Basket

  No. of
Constituent Funds
AUM (HK$m) Market Share
(% of Total MPF Assets)
Market Share
(% of HK/China equity)
Calendar Year-To-Date
 Median Return
Total MPF Assets 417 1,041,969      
           
Equity Fund (HK & China) 64 247,054 23.71%    
           
China Equity (Active) 6 23,668 2.27% 9.58% 7.92%
China Equity (Passive) 4 1,238 0.12% 0.50% -12.19%
Greater China Equity (Active) 11 48,694 4.67% 19.71% 15.40%
Greater China Equity (Passive) 1 6 0.00% 0.00% 5.66%
HK and China Equity (Active) 6 30,980 2.97% 12.54% 0.52%
HK Equity (Active) 20 81,287 7.80% 32.90% 4.16%
HK Equity (Passive) 16 61,180 5.87% 24.76% -13.85%

Source: MPF Ratings