Poor annual results show just how much MPF needs alternatives, say experts

Extreme market conditions explain some, but not all, of the reasons for the sharpest contraction in Hong Kong’s retirement fund since 2008 - reforms are needed to the 22-year-old system.
Poor annual results show just how much MPF needs alternatives, say experts

Amid some of the worst market conditions for more than a decade, Hong Kong’s fund industry has called for the introduction of new - and possibly riskier - asset classes that could provide better long-term risk-adjusted returns to the city’s retirement scheme.

These would include exposure to more volatile assets such as alternatives, high yield bonds; and new offerings in the hedging and decumulation space.

The remarks come after retirement funds overseen by Hong Kong’s Mandatory Provident Fund Schemes Authority (MPFA) reported an annual investment loss of 8.2% for the fiscal year ended March 31, 2022, dragged down by the slump in Hong Kong, China and regional Asia equities in the period.

Source: MPF Ratings

The result was the second worst since 2008, and only slightly better than the 8.6% loss seen in 2019.

As a result, the total assets under MPFA’s supervision shrank by 4.1% from a year earlier, from HK$1.17 trillion to HK$1.12 trillion ($142.8 billion) as of the end of March, according to MPFA’s annual report published last week.

This is the most significant asset downsize since the 12.3% decrease in 2008.

But MPFA noted that the annualised net return of the MPF system since its inception in 2000 was 3.6%, higher than the corresponding inflation rate of 1.8% over the same period.


Compared with other pension funds and sovereign wealth funds globally, MPF’s negative return is “very significant”, said Diego Lopez, managing director at data platform Global SWF.

Global equity markets only worsened during the second quarter of 2022, so those reporting June 30 were most affected, but not those as of March 31, he noted.

The year ended March 31 has been difficult, especially for Hong Kong and China equities, in which 25% of MPF assets are invested.

“That would be the single most significant reason for the relatively poor performance,” said Francis Chung, chairman of MPF Ratings.

As of March 31, 56% of MPF assets were invested in Hong Kong assets. Assets in the rest of Asia accounted for 15%, with another 20% going to North America, and 9% in Europe.

MPF asset allocation as of March 31, 2022 (Source: MPFA)

In the second half of 2021 towards the first quarter of 2022, the Hang Seng Index slumped for three consecutive quarters, losing almost 24%.

The Tech Index, meanwhile, comprising mostly Chinese internet giants, plummeted 45% throughout the year on a combination of China’s regulatory crackdown, rising US interest rates, geopolitical tensions, the global economic slowdown, and the Omicron outbreaks in Hong Kong and mainland China.

Francis Chung, MPF Ratings

“If 2022 has taught us anything, it is there are periods during an investment cycle where traditional asset classes can be highly correlated and therefore do not avail members of the diversification benefits,” said Francis Chung, chairman of MPF Ratings.


“There are asset classes which are lowly or negatively correlated with traditional asset classes, and these asset classes have expanded and matured over the two decades of MPF’s existence,” Chung told AsianInvestor.

Compared to some global peers, MPF’s investment is not centrally managed. Under MPFA’s supervision, different MPF managers provide retail funds for members to decide their own allocation. 

After 20 years of development since 2000, asset classes that MPF can invest in are very much limited to the public market. These include public equities, low-risk bonds, money market funds, cash and deposit, and index funds.

Funds of riskier assets such as high-yield bonds and alternative assets are not permitted. But MPFA has made some “minor” expansions to investable assets over the years, including adding globally listed real estate investment trusts (REITs) and gold exchange-traded funds (ETFs).

Most recently, an updated regulation that allows MPF to invest in Chinese government bonds and three policy bank bonds was in effect from June 1.

Also, from July 2023, the benchmark for MPF mixed asset funds, 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.

“A review of the current MPF fund choice framework is also underway with a view to constructing a framework to facilitate the development of more types of retirement solutions that could better match scheme members’ expected outcomes,” MPFA Chairman Ayesha Macpherson Lau said in the annual report.

“The MPFA appears to take a cautious approach to introduce new asset classes into MPF, rightly citing that it has a responsibility to protect members, however, the protection of members should not be at the expense of better diversification and long-term risk asset returns,” Chung said.

“MPF Ratings would agree that without the necessary knowledge and understanding, asset classes should not be made directly available to members. But if the investment universe was broader, it would allow multi-asset portfolio managers to build better diversified funds which generate better risk-adjusted returns over the long term,” he added.

Sally Wong, HKIFA

Agreeing with Chung, chief executive officer of the Hong Kong Investment Funds Association (HKIFA) Sally Wong thinks these additional return drivers could include certain exposure to high yield bonds; introducing hedging offerings; allowing a wider spectrum of instruments to enable MPF fund managers to manage risks; or to allow certain exposures to alternatives.

Also, she thinks the framework should better align between accumulation and decumulation, and consider the integration of the decumulation offerings.

“As more and more members reach the retirement age, the decumulation phase becomes more pertinent. But the framework is not fit for purpose for developing decumulation products,” Wong told AsianInvestor.

A decumulation phase means converting pension savings to retirement income. The investment strategy during this phase is usually about capital preservation, and ensuring holding or withdrawing the correct assets in a good position.

As of the end of March 2022, MPF had 4.59 million members.

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