The tragedy of 33 per cent: Hong Kong equity MPF’s 2017 winners and losers

In 2017, the 49 Hong Kong equity MPF funds averaged a return of nearly 40 per cent. Everybody sounds like a winner — until you look at the layers. Of the 12 worst-performing funds, 11 were actively managed stock-picking funds; the two worst returned only about 33 per cent, underperforming the 18 index funds’ average of 39 per cent. Think 33 per cent looks great? Absolute returns matter, but relative returns are the crueler truth.

The layers: active funds own both extremes

The 49 funds fell roughly into three tiers:

See it? The best and the worst were all active funds; the steady middle hugging the average was all index funds. If you picked a Hong Kong equity MPF in 2017, your outcome ranged from 50 per cent at the top to 33 per cent at the bottom — and both ends of that range were decided by the “human factor”. With an active fund, the manager’s skill is your fate.

The strong stay strong: two exceptions that beat the market

Active funds are not without winners. The original named two:

• Sun Life Rainbow MPF Hong Kong Equity Fund: up 42 per cent in 2017
• Haitong Hong Kong SAR Fund: up 50 per cent in 2017

More important is the long-term record: both delivered cumulative returns of more than seven times over the past 15 years, far ahead of their peers. That is something index funds struggle to match — the ceiling on an active fund genuinely is higher. But there is only one condition: you must pick the strongest.

The passive maths: trailing the Tracker Fund is normal

The Tracker Fund of Hong Kong (2800) delivered a total return of 40.5 per cent in 2017. Trustees’ Hang Seng index funds charge 0.6 to 1.2 per cent in fees, versus just 0.1 per cent for the Tracker — on fees and tracking error alone, passive index funds generally trail the Tracker by about 0.5 to 1.5 percentage points. So underperforming the Tracker with an index fund is normal, not manager failure.

As for which trustee’s index fund to pick: over a single year the differences are small, but stretch it to five years or more and the gaps in fees and tracking ability show. Trustee quality is not the decisive factor — time is the magnifying glass.

Myth-busted: why 33 per cent is a tragedy

Many investors felt delighted with 33 per cent — the frog at the bottom of the well, unaware how big the world outside is. In the same bull market, index funds collected nearly 40 per cent lying down, the strongest active funds took 50 per cent, and your active fund managed 33 per cent. That is the cruelty of relative returns: your fund did not lose to the market; it lost to the other choices available that same year.

In 2017 Hong Kong equities were driven by tech and mainland property names; whether 2018 belongs to the old economy or the new tests the fund manager’s skill. If you insist on an actively managed Hong Kong equity fund, the conclusion is simple: pick only the strongest, verified by long-term records — five, ten, fifteen years — not one lucky year.

Action list

1. Look at relative returns before absolute returns. Ask not “how much did it make” but “how much did its peers make” — an active fund trailing the average still charges you active fees.
2. If you go active, go with the proven strongest. Look for records on the scale of seven-times cumulative over 15 years; an active fund with no long-term record is not worth active fees.
3. If you go passive, think in five-year blocks. One-year differences are small; fee and tracking-error gaps over five years or more are the real dividing line.