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Show me the money: what you need to know about your MPF contributions

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Do you invest your MPF contribution wisely, or is it more a question of ticking a few boxes at random and hoping for the best? Sam Agars gets some advice from three DB brokers on constructing a balanced and diversified portfolio that will set you up for retirement.

The mandatory provident fund (MPF) scheme has been running since the year 2000, and it was put in place to ensure each and every Hong Kong resident enters retirement with some money to support themselves. The government views MPF as the first and most basic of pillars when planning for retirement, believing that something is better than nothing – hence its mandatory directive.

There are currently 19 providers to choose from. Nearly all of the schemes are administered by household names from within the banking and insurance sectors, with the exception of one independent consortium, which specialises exclusively in pensions. Over the past five years, a number of regulator-driven initiatives have led to a reduction in fees and a broadening in the range of investment funds, which is great news for everybody.

While you are automatically enrolled in a scheme by your employer, and are tied to it for their contribution, you are free to choose providers for your own contribution. (Both employer and employee must contribute a minimum of 5% of the first HK$25,000 of salary each month.) But how many of us take this investment opportunity seriously? More often than not, don’t we simply tick a couple of boxes and forget about the whole thing?

What many people don’t realise is that there is plenty of advice available on how best to invest your MPF contribution. Each provider has its own bank of information to help you through your choices, while there are also specialised websites to allow you to compare the host of providers out there. Or, if you choose to go one step further, there is the option of enlisting the assistance of a broker to ensure you are getting the absolute maximum out of your retirement fund.

Back to basics

Most of us, on starting a new job, are presented with an MPF form by our employer, which offers us a couple of options as to how we would like our contribution to look. The first option is the default investment strategy, which is a mixed assets fund constructed by the provider. The second option involves choosing from a host of different funds (money market funds, guaranteed funds, bond funds, mixed asset funds and equity funds), and selecting a percentage of each to make up 100% of your contribution.

DB resident John Parsons of St James’s Place Wealth Management (SJP) outlines exactly what each option involves.

“A money market fund comprises short-term, liquid debt and monetary instruments,” he says. “It is effectively a cash-equivalent asset and often characterised as a low-risk, low-return investment. A guaranteed fund provides a guarantee to investors, usually on the principal capital or on the investment rate of return. Some guaranteed funds offer conditional guarantees, which may require the fulfilment of a set of qualifying conditions.

“A bond fund invests in fixed income securities and debt instruments issued by governments and corporations. Fixed income securities have an assured cash flow and a specified maturity, hence it is generally considered a lower risk investment than the equity fund,” John adds. “An equity fund invests in stock securities. Their returns tend to be more volatile as an asset class. A mixed assets fund may hold a mixture of cash, bond and equity as its name suggests.”

While the majority of us choose the default investment strategy, there’s a tendency for those who choose to select their funds themselves to do so at random, without seriously thinking about the ramifications.

DBer Mark Kirkham, the chief executive of Platinum Financial Services, advises against this. “Perhaps just take it a little bit more seriously,” he says. “It is your future, after all, so take an interest.

“If you’re not going to take advice, and have little clue about where your money should be invested,  then opt for either the default investment strategy or one of the diversified managed funds, which are offered by all providers,” Mark adds. “But the providers are well set up to provide information, so take advantage of that, or consult a licensed intermediary to make sure you are making the correct choice.”

MPF contributions

Taking the plunge

According to fellow DBer Gordon Franks, managing director at LFS Brokers, your choice of investment strategy will have a lot to do with where you are in your working life.

“It all depends on the time to retirement,” he says. “If you are close to retirement, you should consider the guaranteed or money market funds, because you can’t predict the volatility of the markets. If you have 20 years until you retire, you may as well be in an equity fund or take some risk, because if the markets go down you have got time to come back up again.”

The guaranteed, money market and bond funds are the more cautious options, but Mark is quick to point out that they still have a role to play even in more aggressive portfolios. “They are cautious but that doesn’t mean they wouldn’t co-exist within a balanced portfolio or an aggressive portfolio,” he says. “Even if you see yourself as adventurous, that doesn’t mean you have to put all your money on 29 black. You will have some equity exposure but also some bond or cash exposure – a balanced and diversified portfolio will invest across a whole spectrum of assets, and allow you to rest easy when the markets get choppy.”

John warns that the safest option is not always the best option. “Cash, bank deposits and money market funds would appear to be safest since their value does not drop, but returns on them are low nowadays, in fact typically lower than inflation rates. Therefore, in the medium to long-term, there is a risk of a purchasing power loss, i.e. a risk to go backwards when adjusting asset value for inflation.

“Similarly, guaranteed funds can be psychologically comforting, however they are likewise exposed to inflation risks, since guaranteed rates are low,” John adds. “The cost of the guarantee means that upside potential embedded within such products (and thereby its inflation protection ability) is limited.”

Time to prosper

With a new year comes new opportunities and, with the market continuously changing, it pays to stay on top of the latest trends. While it is very much an inexact science and Mark is quick to point out there are no certainties, he feels commodities could be a strong option in 2018.

“From a market perspective, I think it will be a good year for commodities, certainly that is what all the specialists are telling us,” he says. “It’s been a while since commodities have had a rally, and some of them are certainly due one. I don’t have a crystal ball but I’d say there is nothing wrong with having some exposure to commodities in the coming year.

“Property funds traditionally deliver consistent inflation-beating returns, but with the government curbs starting to bite hard in certain areas, residential property looks and feels overvalued right now,” Mark adds. “In fact if Hong Kong is heading for any sort of correction or downturn, it is likely to affect residential property prices in the short term. We will see what happens as 2018 unfolds.”

According to John, keeping a balanced portfolio is still the best way to go.

“Markets have proven to be wildly unpredictable in recent years. Political turmoil also added to the uncertainty. SJP does not bet on a particular type of asset class or attempt to benefit from timing the markets. Studies have shown that investment results are more dependent on investor behaviour than market performance, with investors rarely succeeding in timing the markets and executing the perfect strategy of buying low and selling high,” John says.

“Since the best performing investment in one year can often turn out to be the worst performing investment the next year, SJP recommends clients to stay invested in properly constructed and well-diversified portfolios. By spreading assets across a selection of asset types, as well as countries and sectors, investments stand a better chance of achieving more consistent returns.”


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