MPF bond funds: low risk, respectable returns, and a portfolio balancer

This article is a rewrite of a report from September 2012.

Last time: choosing MPF by risk tolerance. This time: the role bond funds play in a portfolio.

What are MPF bond funds?

Bond funds invest mainly in bonds or debt instruments issued by governments, public bodies, banks, commercial entities or multilateral institutions, earning through interest income or bond trading. Generally, bond funds are a lower-risk MPF category with steadier returns — suiting risk-averse workers and near-retirees.

Why did Hongkongers shun bond funds?

Low risk read as low excitement, so they were often ignored. MPFA statistics to June 30, 2012 showed:

A stark imbalance — Hongkongers clearly favoured equities.

Were bond-fund returns really poor?

No. To June 30, 2012, bond funds posted the best one-year annualised return at +1.5%, far ahead of equity funds’ -14.9% loss. Over three years, five years and since the system’s launch, bond funds stayed positive and steady while equity funds swung wildly.

Bond markets track equities less closely, so performance stays smoother. Whether or not retirement is near, adding bond funds diversifies and balances risk — in volatile markets they’re a haven.

What bond funds were available?

As of August 31, 2012, 40 of 464 approved constituent funds were bond funds — about 9%. Most trustees offered them, geographically spanning global and single-country (mostly Hong Kong-focused). A few offered regional bond funds, like the then-trendy Asia-Pacific bond funds — the region’s governments and corporates were fiscally sound with strong repayment capacity, seen as a new engine of global growth, with Asian currency appreciation potential adding appeal.

With an ageing population, demand for steady-return MPF funds could only grow.