GUM explains why MPF conservative fund cannot reach the level of deposit saving rate

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GUM strategy and analyst Martin Wan pointed out that “While certain members expected conservative fund to be able to reach the level of bank deposit saving rate, they should also understand the factual differences and adjust their expectation reasonably.”

1. Instead of a one-off upward adjust in the beginning of the year, Hong Kong bank deposit rates basically follow US Fed Fund Rate and rise gradually. Therefore, MPF conservative fund YTD return can only be benefited from this on a pro-rata basis. As such, using latest Nov return of MPF conservative fund to compare current time deposit rate is more appropriate instead of using YTD return.

2. MPF conservative funds mainly take reference on prescribed saving rate, which is simple average of the interest rates offered by the three note-issuing banks in Hong Kong on Hong Kong dollar savings account, and not fully mimicking time deposit rate. Therefore the two cannot be compared on the same basis. Still, conservative funds can also place certain portion in deposit rate.

3. In general, only new money can benefit from the high deposit saving rate. For now, there are close to HK$ 100billion belong to MPF conservative fund, but there are only close to HK$2.4 billion (Nov data) belong to new money (i.e new contribution in MPF terms). Therefore, not all MPF conservative fund can benefit from the new money time deposit rate.

Summarizing the above top 3 misconceptions, GUM perceived a realistic annualized return to be 2-3% for Nov 2022.

In Nov 2022, BOCI-P, Manulife and AIA delivered an annualized return higher than 2% (Table3), which was fairly close to the latest bank deposit rank (Table 1). However, some conservative funds delivered disappointing return, which were close to 0%. GUM had asked for written feedbacks from the top 5 MPF providers of the highest market share.

The top performing conservative fund manager, BOCI-P had strategically reviewed its investment portfolio regularly, with on-going efforts to bargain for better rates across banks.  They also expect to be able to strive for higher return in 2023 for member who invests in conservative fund, if the interest rate is to remain at current trajectory.

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As the top market shares provider, Manulife had intentionally, increased duration through deploying upcoming maturity into higher yield investment opportunity under higher interest rate market. They also project that the expected return of the MPF Conservative Fund can be up to 5% in the coming year, barring any drastic surprise like massive economic recession which make the FOMC U-turn on its stance.

AIA commented that selection of bank for placing deposit also affects the portfolio return as some providers due to fund size and internal guidelines may / will not place deposit to certain banks.

Sun Life commented that they would expect the return to pick up in 2023, with the time deposit with shorter tenor and higher deposit rates.

HSBC commented that they have revised the Conservative Funds investment strategy recently and are expecting positive fund return in short term.

GUM Executive Director Billy Wong concluded, “Under the premise of considering different market conditions, an annualized return of 2 to 3% is a reasonable expectation for MPF conservative funds in November. Employers and members can carefully compare and contemplate the roles of trustees and fund managers, and whether they have taken appropriate actions for members to add value in response to market conditions.