When Volatility is Your Friend

Stewart AldcroftBy Stewart Aldcroft

You may well think it is odd to ask the question ‘why don’t MPF members maximise their investment returns’. This and other questions usually arise when talking about Hong Kong’s Mandatory Provident Fund scheme.


“How can Members of MPF schemes maximise their investment when it is always controlled?”


“There is so little choice – and don’t MPF funds perform badly?”


“My MPF is not something I use to invest money.”

As the MPF has been going for more than 14 years now, with so many negative comments appearing in newspapers all the time, you would be forgiven for thinking that it has been an unsuccessful initiative for retirement saving, and that it provides an uninspiring investment choice for Members. The reality, as always, is not as simple as that.

Providers of MPF products tend to do little in the way of promotion or advertising of the actual investment returns achieved by their funds, simply because there is little immediate benefit to be gained.

Nevertheless, even if looking at just the 10 or 5 year performance numbers, there have been some exceptional gains made by investors who selected the correct funds. By the same token, choosing the wrong ones has resulted in significant underperformance – the range of returns is often quite startling.

By way of example, choosing the best equity fund over the last 10 years would have given a return of over 300% (clue: it invests in Hong Kong equities), whereas the worst return over the same time period would have been around 2% (Japan this  time). But as an MPF Member, using both these funds would have given you very different returns than these figures quoted, because your MPF contribution accumulates over the whole of the period on a monthly basis. So despite the (apparently) almost zero return over 10 years from Japan, for the last 3 years you would have made 30%+.Volatility

There is an entirely different dynamic to investment and accumulation when saving monthly over the long term, when compared to the more usual lump sum investing. Volatility is your friend! When markets go down, you can buy more for the same amount, whereas on rising markets you get less, but your existing holdings become worth much more. This is known as “dollar-costaveraging”, and is highly relevant for anyone involved in monthly savings. It has the effect of overcoming the emotional experience that can occur when wanting to change funds from one market to another. You don’t need to worry whether your timing is wrong, you can ignore that.

Every month on local finance websites, there are full listings of the available MPF funds, together with their performance track record going back over various time periods for comparison purposes. The regular basis of assessment most people use is to compare ABC Asian Equity Fund with XYZ Asian Equity Fund. But if you want to know which is best, this only gives part of the answer.

A more meaningful comparison is the performance of all funds offered by the same provider. From this it can often be seen which fund is tracking markets best, and what is the most favourable market trend at that point in time. Thus, if a number of funds are showing consistently low rates of return for 3 or even 5 years, this could present a buying opportunity, assuming they are invested in stock markets where there is a cyclical rotation in returns.

It is also the case that some managers might not be achieving top rated returns, and under the MPF system, it can be difficult to switch quickly to those that are top rated. But this doesn’t matter much, as

Members of MPF schemes should be far more focused on the longer term. If a manager or fund from a leading fund management organization is underperforming for any length of time, this can sometimes be a “buying signal” as such periods of underperformance can often be followed by periods of outperformance.

By its nature as a retirement funding scheme, the MPF is not a ‘short term game’. Members of schemes need to have a long term perspective, make decisions and where possible stick with them, to extract maximum benefit from their participation.  BM