Paying 1.67% for Index Returns: The Closet-Indexing X-Ray of MPF Hong Kong Equity Funds

You think you are buying active management. A fund manager’s name sits on the fact sheet, charging 1.31%, 1.49%, even 1.67% — more than twice what a Hang Seng Index tracker costs. But lay five years of calendar returns side by side, then match the top-ten holdings stock by stock, and an uncomfortable fact emerges: you are paying active fees for an index fund in disguise.

This is not a metaphor. Below is a forensic comparison of six HSI tracking funds against seven actively managed Hong Kong equity funds from six trustees — every return and fee figure taken from the trustees’ own official fund fact sheets for Q1/Q2 2026 (data as of 31 March or 30 June 2026), net of fees, like for like.

The core proposition: double the fee, less than half the return

Start with fees. The six HSI trackers carry fund expense ratios (FER) of 0.78% to 0.99%, averaging about 0.86%. The seven active Hong Kong equity funds range from 0.84% to 1.67%, averaging about 1.36% — 0.50 percentage points more, roughly sixty percent dearer.

Now the five-year cumulative net returns (2021–2025):

* Manulife’s 2024 return (11.13%) diverges sharply from every other tracker (21–22%) and is treated as an outlier; averages cited below use the five consistent trackers. Including Manulife, trackers still average +4.82% over five years versus -10.49% for the actives.

Three conclusions fall out of this table.

First, not one of the seven active funds beat the tracker average. The five consistent trackers averaged +6.65% over five years; the seven actives averaged -10.49% — a 17.14 percentage-point gap. The best active fund (BOC-Prudential, -4.11%) still lost to the worst normal tracker (+5.42%).

Second, the priciest funds are in the active camp. BOC-Prudential Hong Kong Equity Fund charges 1.67% FER — the highest in the table — for a five-year return of -4.11%; the cheapest tracker charges 0.78% for +7.29%. Every extra basis point bought nothing.

Third, look at the 2022 row. Active funds fell systematically harder in the bear market (-15% to -24.51%) than trackers (about -13%), then failed to catch up in the 2024–2025 rebound. Whatever active management was supposed to deliver in this sample, it delivered the opposite: down more, up less.

The holdings evidence: top tens that mirror the index

If the returns lost, at least the portfolios should look “active”. Lay out three funds’ top-ten holdings (Q2 2026 fact sheets):

Fidelity Hong Kong Equity Fund (FER 1.49%): Alibaba 9.80%, Tencent 9.77%, HSBC 8.76%, CCB 5.56%, Meituan 3.76%, AIA 3.69%, Ping An 3.44%, Trip.com 2.86%, China Merchants Bank 2.45%, China Overseas Land 2.22%.

BEA Hong Kong Equity Fund (FER 1.31%): HSBC 9.20%, Tencent 8.68%, Alibaba 7.97%, CCB 5.87%, AIA 4.15%, ICBC 2.45%, Standard Chartered 2.19%, NetEase 1.90%, Meituan 1.74%, Baidu 1.67%.

BOC-Prudential Hong Kong Equity Fund (FER 1.67%): HSBC 8.8%, Tencent 8.4%, Alibaba 8.1%, AIA 4.3%, CCB 3.5%, ICBC 2.6%, Xiaomi 2.6%, HKEX 2.2%, Meituan 2.1%, Ping An 1.8%.

Tencent, Alibaba, HSBC, CCB, AIA, ICBC, Meituan, Ping An — this is the Hang Seng Index’s heaviest-weight constituent list, in nearly the same order. The top ten account for roughly 40–50% of each portfolio, mirroring the index’s own concentration. This is what the industry calls closet indexing: a portfolio that hugs the index while charging an active fee. The managers did nothing wrong — they simply did nothing worth 1.5%.

The compounding cost: 0.50 points becomes HK$568,965

Translate the fee gap into human terms. Assume monthly contributions of HK$5,000 with a 7% gross return (illustrative):

• Average gap of 0.50 points (1.36% vs 0.86%): HK$23,408 over 10 years; HK$152,529 over 20 years; HK$568,965 over 30 years.
• Extreme gap of 0.89 points (1.67% vs 0.78%): HK$41,117 over 10 years; HK$264,081 over 20 years; HK$970,292 over 30 years — nearly HK$1 million, about three times the current average MPF balance (HK$343,242).

And that is only the fee cost, before the return shortfall. On a HK$1 million balance over 2021–2025: the average tracker grew it to about HK$1.066 million; the average active fund shrank it to about HK$895,000 — a HK$171,000 gap, over 17 percentage points. You paid more in fees and earned less in returns. Double taxation.

The breakout plan: three steps to reclaim the 0.78%

Step one, run the holdings test yourself. Log in to your MPF account and open your Hong Kong equity fund’s top-ten holdings. If the top five read Tencent, Alibaba, HSBC, CCB, AIA — and the FER is above 1.2% — you are paying active fees for index exposure.

Step two, make the HSI tracker your default Hong Kong equity core. Trackers with FER as low as 0.78% (HSBC and Hang Seng plans) did over the last five years what your active fund did — only cheaper, and with better returns. When switching, respect forward pricing (T+1/T+2 unknown-price mechanism): split large switches into tranches, avoid high-volatility days around rate decisions, and never go all-in on a blind price.

Step three, lock in low fees through the system. The Employee Choice Arrangement lets you move your current-employment accrued benefits to a low-fee plan of your choice once a year; TVC balances can be transferred in full at any time, no employer involved. Set it once and stop fiddling — real discipline is “set and forget”, not chasing last year’s winner.

One honest caveat: this is a single five-year window, covering three Hong Kong bear years followed by a two-year rebound; active funds did beat trackers in individual years (e.g. Principal Class D’s +35.06% in 2025 versus about +30% for trackers). But the five-year verdict is clear: on average, the 0.50-point active fee bought nothing. Fees are certain; returns are not — when the two diverge for years, the rational move is to reclaim the certain part first.

Nor is this a Hong Kong-only intuition. Morningstar’s May 2026 research found that for funds distributed in Hong Kong, Singapore and Taiwan, fees are a “reliable predictor of long-term success”: the cheapest quintile of funds posted success ratios of 61–75% versus 8–32% for the priciest quintile. That same year, the Lipper Hong Kong Fund Awards’ three-year “Equity Hong Kong” category was won by a passive index fund (BlackRock iShares Hong Kong Equity Index Fund) — the industry’s own trophy, handed to the index.

The final irony belongs to BOC-Prudential: its CSI HK 100 Tracker Fund carries an FER of 1.15% — a tracker priced like an active fund. Closet indexing comes in two flavours: active funds that look like the index, and index funds priced like active funds. Learn to recognise both.