Magazine issues » Summer 2013

INSIDE VIEW:Troubled teen, promising youth

Troubled teenThere is heated debate in Hong Kong society about the local pension fund, which turns 13 this year. Patrice Conxicoeur at HSBC Global Asset Management (Hong Kong) talks the MPF’s successes, challenges and possible developments.

The Mandatory Provident Fund (MPF) will turn 13 this year.

Is it a troubled teenager? Or a promising youth? It seems the answer depends on whom one asks, and may be summarised, perhaps, as a bit of both.

MPF statistics show some unmitigated successes, with enrolment rates at respectively 100% and 99% of the relevant populations of employers and employees.

Its assets stood at Hong Kong $440 billion ($57 billion) while the average yearly returns on invested assets since inception are 4%, according to the Mandatory Provident Fund Schemes’s Statistical Digest, published in December last year.

This compares well with global equities over the same period, whose total return was 3%, according to the MSCI World Indices, with net dividend reinvested. This, of course, is overshadowed by bonds. The BoFAML Broad Market index returned 6% per year and the Hang Seng Index 7.6%.

Those numbers are often bandied about to “prove” that, according to one’s point of view, the MPF is a success or a failure. Seldom do such theories acknowledge that such comparisons are, in truth, borderline irrelevant. Such numbers are “point to point”, which does not reflect the fact that MPF investors invest every month, for a long time, thereby achieving a good degree of time diversification and dollar cost averaging.

Portfolios are, most of the time, more diversified than a single index can suggest, with 40% of assets in mixed funds, and rightly so. The risk profile of the Hang Seng index is such that nobody should invest all their money in it. Bonds have had a fantastic run, but are unlikely to repeat that feat given current yields, which are at multi-decade lows.

Then there is the issue of fees. Indices do not pay any, and fees tend to compound over time.

Pushing fees down will undoubtedly appeal to holders, yet the investment community cannot operate free, especially if investors expect choice and quality.

Views are divided and contentious: striking a balance between the interests of holders and promoters was never going to be easy.

WHERE ARE WE TODAY?
Applying no filter to the fund selection tool on the Mandatory Provident Fund Schemes Authority’s website returns 549 funds, of which 69 have no information at all about their fees.

Setting aside possible issues with the timeliness of the information displayed, this leaves 480 funds to look at.

Without pretending to know “what is right” for fees, it is unlikely that funds charging substantially more than 2% in any category will end up on the winning side of that debate.

There is scope for lower fees in MPF, not only because they give the industry a bad name.

Promoters can choose to take the initiative in this area.

Another simple calculation – total assets divided by the number of funds – yields a stunning result: the average MPF fund has barely more than $100 million in assets, that being the “magic number” many consultants use for viability and profitability of individual funds. This means that the industry as a whole is not profitable, or at least that several of the 19 MPF fund promoters are losing money.

The days when the asset management industry could be considered as having low barriers of entry are long gone. This opinion was wrong in the first place: talented portfolio managers never came cheap, nor did the infrastructure – systems, back office and compliance – they need to operate.

All of these generate high fixed costs.

Granted, the fund management industry is an eminently scalable one, and this is closely related to the size of individual funds. In this sense it is perhaps the case that forcing MPF funds to operate separately from other retail funds was a strategic mistake, although arguments do exist for the segregation of long-term investment savings plans from the fray of short-term trading.

A challenge is to make sure that resources are harnessed in the best possible way.

HOW TO ACHIEVE THIS?
Having consistent processes – investment and control – and common platforms, IT in particular, helps.

But this took years of effort to achieve, and even now, none of this can be taken for granted and it all requires constant adaptation.

Practically, it means that equity portfolio managers and analysts use a common framework to look at stocks, and a unified investment process.

The recent introduction of a small dose of portability in the MPF system – the Employee Choice Initiative (ECA) – adds a few more logistical challenges. Historical precedents in other jurisdictions make it look unlikely that portability will stop at the ECA.

Provided the right IT tools are in place, this is something the industry should embrace and welcome.

However, there is still too much scope for funds not being invested in a timely manner while MPF members switch their funds from one provider to another. Automation and web-based interfaces should take care of this over time.

In this context, the value-add of using third-party managers in a sizeable and mature MPF platform is one that will be increasingly questioned.

Patrice Conxicoeur is managing director, global head of insurance coverage, at HSBC Global Asset Management (Hong Kong)

©2013 funds global asia

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