MSCI launches its first indices to meet MPF rules

The index provider says its new products negate the need for managers to currency hedge to meet the Mandatory Provident Fund's 30% rule on minimum HK dollar assets.
MSCI launches its first indices to meet MPF rules

Index provider MSCI has launched its first indices to comply with Hong Kong's Mandatory Provident Fund (MPF) guidelines. Its products now sit alongside those from FTSE and Hang Seng.

MSCI claims its Hong Kong MPF Indices, which are split into domestic, hedged and unhedged, will offer cost savings. A year ago Vanguard dropped MSCI for FTSE as its benchmark provider on 22 US-domiciled index funds over cost in what was the world's largest benchmark switch.

MPF requirements state all funds must have 30% of portfolios invested in Hong Kong dollars. However, HK dollar-denominated assets typically account for a small proportion of a global portfolio.

This means managers need to hedge currency to comply with the guidelines, which becomes costly, notes Chia Chin-ping, managing director and head of Asia-Pacific research for MSCI.

But these new indices apply a 30% floor to the weight of the HKD-denominated component – enabling funds tracking these indices always to have 30% exposure to Hong Kong stocks.

“We made indices by increasing the weight of the Hong Kong component in a regional/global index," Chia tells AsianInvestor. "By doing so, these indices become more reflective of the investment process of MPF managers and at the same time satisfy the MPF's requirement. And we automatically eliminate [managers’] need to hedge.” 

Since its launch in 2000, MPF schemes have “grown in size and complexity, so it is not surprising that many participating firms are keen to see more innovation in the provision of relevant MPF indices”, suggests Theodore Niggli, head of MSCI index business for Asia Pacific.

These indices – which may be licensed for use as benchmarks or as a basis for exchange-traded funds and structured products – will track large and mid-cap securities across developed and emerging market countries.

A spokeswoman for the MPF Authority declined to comment for this article.

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