Sixteen years of the MPF: the pricier the fund, the worse the return

Sixteen years ago today — 1 December 2000 — the Mandatory Provident Fund system was launched. For all 16 years, “high fees” have been employees’ number-one complaint: the average fund expense ratio (FER) still stood at 2.06 per cent in mid-2007 and has only fallen to a record low of 1.56 per cent at the end of this October — down about a quarter in nine years. An MPFA non-executive director put it bluntly: the decline has not been deep enough or fast enough.

Breaking down the numbers: three fee-return patterns

Drawing on the MPFA’s study published last week, the fee-return relationship breaks down like this:

In other words, expensive equity funds are no sure winners — and the other three categories are sure losers when fees run high. The MPFA director’s advice: make fees a primary consideration when choosing a fund.

The British mirror: over half of retail investors don’t know fees exist

Days before the MPFA released its study, the UK’s Financial Conduct Authority (FCA) published its “Asset Management Market Study: Interim Report” (November 2016). Though aimed at Britain, it holds up a mirror for Hong Kong: over half of retail fund clients had no idea their investments involved fees — baffled by jargon like “expense ratio”, and unaware even of the basic fact that professional fund management cannot be free.

Against that backdrop of ignorance, what incentive does the asset-management industry have to win clients with low fees and compete on price? Hong Kong’s employees are unlikely to fare much better.

Two levels of the problem

The fee-return question should be examined on two levels:

1. Investor awareness: how well do employees understand fund products and fees? If they don’t know what a fee is, where would market pressure to cut fees come from?
2. Actual performance: the data has spoken — expensive funds carry no performance guarantee, and mixed-asset, bond and guaranteed funds show an inverse relationship: higher fees, worse returns.

The myth: “you get what you pay for” does not apply to fund fees

Buying a fund is not buying an appliance. A pricier appliance may genuinely have better parts — but an expensive fund does not mean a better fund manager. The data proves it: expensive funds did not outperform, cheap funds did not underperform. Equating “expensive” with “good” is the costliest misunderstanding in the MPF world.

Action list

• Look at fees first when choosing a fund: with similar objectives, prefer the cheaper one
• Learn what “fund expense ratio” means — it is money deducted from you every year
• Use the MPFA’s fee-comparison platform; don’t be a clueless retail investor
• Ask your trustee one question: is my fund’s fee expensive among its peers?