Looking back over the past 20 years, the average return achieved by MPF funds has outperformed inflation over the same period. However, many members still hope to achieve even better performance.
Mrs. Ayesha Macpherson Lau, the Chairperson of the MPFA, who took office in March this year, recently pointed out at a media event that she is open to advancing the MPF system by allowing a wider spectrum of investment funds, so as to increase future potential investment returns. To achieve this, what funds should be considered, and what factors should be taken into account?
Compared with the current fund choice in the MPF system, there is arguably a missing piece that can provide relatively stable returns. To date, only a few MPF trustees offer investment funds that provide monthly dividends. For this type of fund, the trustees determine the monthly interest rate based on market conditions. The level of dividend payable may vary from month to month, but the fund’s stated objective is to make monthly payments. This type of fund is suitable for members who are close to retirement, or members who have already retired and want to leave their MPF funds invested, whilst having access to regular monthly income withdrawals.
Many members are seeking funds with higher potential returns within the MPF system, and emerging market equities and bonds can potentially fill this gap. As an example, equity funds that focus on South America or Africa. However, we should be aware that when it comes to emerging markets, the associated risks will be higher than those available within the current MPF system. In addition to regional-based funds, funds that focus on industries or other themes may also be considered, such as REITs and mortgage-linked products, or ESG (Environmental, Social and Governance) funds.
Some people worry that, by increasing fund choice, it may be a problem for members who are not experienced investors. We believe that the current MPF system has measures in place to help members who do not have the knowledge and experience to decide where to invest. For example, all providers are now required to offer a default investment strategy (DIS), which automatically adjusts the investment mix based on a member’s age. DIS would be one of the measures to address this concern.
Broadening the fund choice will likely involve some areas that require more complex investment knowledge. Different members may have quite different expectations and perceptions of the related risks and returns. Taking emerging market bonds as an example, the default probability for the bonds in this asset class will be higher, and they could also be subject to foreign exchange risks. For providers who offer an extended range of funds on their platform, it will be necessary to include appropriate disclosures around risks.
As the number of fund choices increases, one might reasonably expect members to switch funds more frequently in response to changing market conditions, but this seems in contrast to current practice and also the concept of long-term investment. Investment markets change very frequently, and even experienced full-time investors may not be able to capture potential opportunities. Therefore, for long-term retirement savings, the most important thing is to select funds according to your chosen tolerance for risk and work towards your investment target by pursuing dollar cost averaging and the impact of compound interest, rather than chasing outperformance through frequent fund switching.
We look forward to the MPFA's consultation and reforms of widening the investment fund choice. Consultation is very important, and the MPFA has to balance its responsibilities of supervision with enriching the universe of investment fund offerings. In preparation for this, members would be well advised to familiarize themselves with various investment tools through different channels, and make better preparations for more MPF funds in the future.
This article in English and Chinese is available for download.
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