Switching Won’t Cut MPF Management Fees? Bankers Push Hong Kong Bonds

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

On the eve of semi-portability, the government hoped competition would force fees down. But a Professional Commons report poured cold water: Hong Kong’s immature bond market had pushed two-thirds of MPF assets into high-cost Hong Kong equity funds — switching trustees wouldn’t cut management fees.

What did the report argue?

The disease is no bonds to buy, not no competition. Written by three veteran bankers, it argued equity funds need managers watching volatility and trading constantly — labour-intensive, so fees can’t fall. Bonds, with long maturities, need only occasional rollover: far cheaper to run.

What was the prescription?

Government should lead with bond issuance. The report urged the government to fund future mega-infrastructure (like the airport’s third runway) with Hong Kong-dollar bonds, deepening the local bond market so corporates switch from foreign-currency issuance — giving MPF stable, cheap HKD bond funds. Estimated fee: as low as 0.5%, under a third of the then-average 1.74%.

What backed it up?

MPF volatility matched the Hang Seng’s over ten years. Citing an EY study, the report found about two-thirds of MPF money in equities — far above overseas norms — making MPF little different from stock investing. A simulated decade of HKD bond funds: lower peaks than equities, but steady and never loss-making.

What is the lesson from 2012?

High fees sometimes reflect a shallow pool, not greedy trustees. This 2012 report shifted the target from “price wars” to “product structure”: with no cheap bond funds to choose, switching changes nothing. Bond choice has grown since — but the logic that cost structure sets fees hasn’t.