Same Starting Line, 9 Percentage Points Apart: The Execution Gap Inside Hong Kong’s “Lazy Fund”

The MPFA’s provisional end-August data exposes an uncomfortable truth: across Hong Kong’s trustees, Default Investment Strategy (DIS) funds averaged 12.4% over the past 12 months — but the best earned 20.1% while the worst earned just 11.2%. Same statutory reference portfolio, different trustees, and 8.9 percentage points of daylight between them.

DIS has always sold itself as “decent returns without choosing”: the Core Accumulation Fund (CAF) has returned roughly 6.5% annualised since its April 2017 launch (as of 20 August 2026), and 12.4% on average over the past 12 months. But behind that average hides something even Hong Kong’s toughest fee regulation cannot control — tracking error.

One starting line

Under the FTSE Russell Ground Rules for the MPF Reference Portfolios (v1.7, December 2025), the CAF’s statutory reference portfolio is: 60% FTSE MPF All-World Index (unhedged, HKD) + 37% FTSE MPF World Government Bond Index (hedged, HKD) + 3% MPF prescribed savings rate. The rules further stipulate that the reference portfolio is calculated net of a 0.95% annual fee — the original statutory fee cap.

In other words, every Core Accumulation Fund builds to the same blueprint: the same equity-bond split, the same benchmark indices. Over the past 12 months, one trustee delivered 20.1%, another just 11.2%.

Why does the same blueprint produce a 9-point gap? Willis Towers Watson’s DIS teaching materials flagged the answer long ago: most trustees’ DIS funds are actively managed, aiming to beat the reference portfolio, while only a minority run passively to hug the benchmark. Active management is an amplifier in a bull market — with global equities strong over the past 12 months, managers willing to deviate from the index shot to 20.1%. But in a year like 2022, the same active deviation can cut the other way. The Manulife Hong Kong Bond Fund’s -9.46% and the HSBC Age 65 Plus Fund’s -13.21%, both in 2022, are historical evidence of active execution deviations.

The compounding cost: a one-percentage-point execution tax

The one-year 8.9-point gap alone is worth HK$30,548 on the average member balance of HK$343,242 (MPF Ratings, September 2026). A full month’s mandatory contributions would not fill that crack.

Persistence is what hurts. Suppose a fund’s tracking deviation runs against you at 0.5 percentage points a year. Illustrative 30-year scenario, HK$5,000 monthly contributions, 7% gross return:

A 30-year gap of HK$568,965 — more than 30% of total contributions (HK$1.8 million). The fee cap (0.85%) controls the price but not the execution. There is also a structural “alpha” in the system: the reference portfolio is deducted at 0.95% while actual funds average only ~0.77%, and that 0.18-point institutional gap alone is worth roughly HK$212,000 over 30 years. But if a fund’s active bets go the wrong way, they can swallow far more than those 0.18 points.

The fix: make the reference portfolio your mirror

First, audit. The MPFA’s designated provider of daily reference-portfolio performance data is Willis Towers Watson, published on mpfexpress.com — the single uniform yardstick for the whole city. Compare your scheme’s Core Accumulation Fund against the reference portfolio for 1, 3 and 5 years. Lagging by more than 1 point a year, persistently, is execution deviation — not luck.

Second, recognise the institutional dividend. The DIS fee cap is 0.85%, the actual average is only ~0.77%, while the market-average fund expense ratio is 1.36%. Choosing a passively managed, benchmark-hugging DIS fund captures a 0.59-point fee advantage for free — worth roughly HK$665,000 over 30 years on HK$5,000 monthly contributions at 7% gross.

Third, vote with your feet. Employees hired on or after 1 May 2025 gain full portability from this year under phase one, moving mandatory contributions to lower-fee, better-tracking schemes; phase-two legislation for the rest is expected to reach LegCo by mid-2027. Existing employees already get one free annual ECA transfer of their employee mandatory contributions.

Finally, the MPFA is running a full DIS review — fee cap, the age-50 de-risking line, and the equity-bond split — targeting completion next year. The Policy Address also requires a review of the ITCIS framework by end-2026 and the removal of the cap on MPF funds’ investment in index-tracking ETFs, meaning cheaper replication options are coming. Until then, the 9-point gap remains a mirror every member must hold up for themselves.

Illustrative calculations only; not investment advice. Past performance is not a guide to the future. Sources: MPFA provisional data (end-August 2026), FTSE Russell MPF Reference Portfolios Ground Rules v1.7, MPF Ratings report of 24 September 2026, HSBC MPF monthly fund performance summary, 2026 Policy Address.