Hong Kong's pension scheme heads for first loss since 2018, prompting fund managers to seek wider investment scope

Fri, December 24, 2021

The Mandatory Provident Fund (MPF), Hong Kong's compulsory retirement scheme, is set to register its first loss in three years due to the equities slump that wiped out value in the city's stock market and the exchanges of Shanghai and Shenzhen.

The nearly 400 investment funds under the MPF scheme lost HK$14.8 billion (US$1.9 billion) in the first 11 months, according to the data provider MPF Ratings. The pension of each of the city's 4.5 million MPF members shrank by about HK$3,288, a loss that is unlikely to be recovered, with Hong Kong's key index still wallowing among the world's top losers as the year draws to a close.

The MPF funds suffered a 0.4 per cent loss on average in the first 11 months. If the trend continues this month, the HK$1.2 trillion (US$153.8 billion) pension scheme will post its first yearly loss since 2018 when the funds fell 8.21 per cent on average

Hong Kong and China equity funds were the worst performing MPF funds, losing 12.8 per cent in the year to November, according to MPF Ratings. A crackdown on Chinese tech companies, along with a slowdown in the property market and pandemic-driven economic slump contributed to a sell-off this year.

The Hang Seng Index has lost about 15 per cent so far this year through December 22, erasing about US$283 billion of market value from its 64 blue-chip members. The CSI 300 Index, which tracks the biggest companies listed in Shanghai and Shenzhen, fell 5.6 per cent. MSCI China, a gauge of more than 741 companies listed in onshore and offshore markets, slumped 23 per cent.

To enhance longer term returns, analysts said the pension regulator should continue to relax investment restrictions on MPF fund managers.

The Mandatory Provident Fund Schemes Authority (MPFA) in November last year relaxed rules, allowing MPF fund managers to invest in yuan-denominated Chinese shares listed in Shanghai and Shenzhen.

Analysts attributed this year's milder loss to the easing of the investment rules. Before that, Hong Kong and China equity funds could only have Hong Kong stocks or Chinese stocks listed overseas in their portfolio but not shares listed on mainland bourses.

MPF: Hong Kong's pension regulator mulls allowing members to invest in sovereign bonds

"Before the relaxation, we only had 300 stocks in the original Hong Kong equity sleeve," said Jacky Cheng, senior associate at consultancy firm Willis Towers Watson. "Now, under the new Hong Kong and mainland sleeve, we have more than 1,000 stocks."

Cheng said the combined returns of the mainland-listed shares and Hong Kong were better than Hong Kong stocks alone in the past three-year period.

"The easing of rules does raise the profile of Chinese equities as a whole, arousing interest from investors to tap into the structural growth opportunities both in the onshore and offshore China equities space," said Ronald Chan, head of equities for Asia at Manulife Investment Management, the largest MPF provider in Hong Kong.

While the MPF's investment returns have not been good this year, Chan said Manulife's MPF China Value Fund, which has exposure to A shares and is one of the most popular funds in the company's MPF profile, showed cumulative returns of 29.7 per cent for three-year period to November and 52.9 per cent over a five-year horizon.

"Over the longer term, China A-shares provide opportunities in companies and sectors that are not available in China H shares and Hong Kong names, helping investors diversify and look for exposure in China's structural growth," Chan said.

The MPFA, meanwhile, is set to continue easing rules further. Next year, the MPF will allow investments in Chinese government bonds.

Christopher Hui Ching-yu, Secretary for Financial Services and the Treasury, said on Wednesday that the government will seek legislators' approval by the middle of next year to amend a law to allow pension funds to invest in bonds issued by the central government and the mainland's policy banks.

"This initiative will further diversify the products for MPF investment, which is not only responding to the MPF industry but also helping MPF schemes members seize the opportunities in the mainland bond markets to strive for better return," said Ayesha Macpherson Lau, chairwoman of the MPFA.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

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