15-year Investment Performance Review of the MPF System

26 January 2016

1

MPF: 2nd pillar

2

Mandatory, privately

managed, fully funded contribution

system

3

Voluntary savings

4

Informal support,

other formal social

programmes, other

individual assets

1

Mandatory, contributory and publicly

managed system

0

Non-contributory,

publicly financed and

managed system

2

3

MPF is a long-term investment, its return is characterized by the compounding effect

I.

Objectives of the MPF System

• Employment-based system set up to assist working people to save for retirement

• It takes 40 years for a retirement savings system to mature

• MPF System in operation for only 15 years, still in the development stage

• After 40 years, will start to see comprehensively the benefits that such a system can produce

4

MPF’s compounding effect

• With a contribution of $1,500 each month, the savings will be:

Assumed Rate of Annual Return

20 years 30 years 40 years

2% $442,000 $739,000 $1,102,000

3% $492,000 $874,000 $1,389,000

Total Contribution

$360,000 $540,000 $720,000

5

6

Cont’d MPF’s compounding effect

360,000

540,000

720,000

442,000

739,000

1,102,000

492,000

874,000

1,389,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

($)

Contributions Made

Contributions + 2% Return per Year

Contributions + 3% Return per Year

40

Investment Horizon (Number of Years)

II.

7

MPF invested in financial instruments in the market investment performance affected by the cycles of the financial market

MPF performance affected by the market

• The MPF is invested in financial instruments in the market

• Investment performance is inevitably affected by the cycles of the financial market

• Financial market can be very volatile at times

8

Dollar cost averaging

$10

$8

$5

$4

$6

$5

Jan Feb Mar Apr May Jun

Average price：$5.8 Fund prices

Fund units

100 units

125 units

200 units

250 units

166 units

200 units

9

III. Scheme members should not try to time the market

10

Risk of “buying high and selling low”

• Anticipating market rises and falls is impossible

• If you switch funds simply based on short-term market performance, may result in “buying high and selling low”

11

IV.

12

Scheme members should look at the System’s return with care

Look at System’s return with care

• System’s return≠ Individual member’s return

• System’s return reflects:

collective investment choices of all members

the results of their investments across many different asset classes and regions

13

MPF and Tracker Fund

Tracker Fund MPF System （as at 30 September 2015)

Asset Class

Equities ─ 100%

Equities ─ 65%

Debt Securities ─ 19%

Deposits & Cash ─ 16%

Geographical Region

Hong Kong ─ 100%

Hong Kong ─ 62%

North America ─ 14%

Europe ─ 11%

Asia ─ 8%

Japan ─ 5%

14

V.

15

Different scheme members have different investment portfolios; when comparing fund performance, compare like with like

Comparing like with like

• Different scheme members have different investment portfolios

• They should compare their portfolios’ performance with that of the same type of product

16

VI.

17

Different types of funds have different returns; saving outcome hinges on members’ investment decisions

Saving outcome hinges on various factors

• Different types of funds different returns

• Not all scheme members have the same return, depending on： their choice of fund the timing of their participation the performance of the markets the funds invest in

18

Fund Type

Timing of participation

Market performance

Fund performance in line with those of the markets they invest in

Stock Markets

Equity

Funds

HKD Savings Rate

MPF Conservative

Funds

19

VII. MPF has added value to members’ retirement savings

20

100

200

300

400

500

600

700

Dec 2000 Dec 2001 Dec 2002 Dec 2003 Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014

HK

$ b

illio

n

Accrued Benefits Total Net Contributions Received

MPF accrued benefits and total net contributions received (Dec 2000 - Nov 2011)

$590 billion (Investment returns: $114 billion)

21

Nov 2015

MPF System’s return

3.1%

1.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

15-year annualized rate of return of the MPF System

Average inflation rate over the same period

22

VIII.

23

A high proportion of MPF assets are invested in equities, the performance of the stock markets has a great impact on the System’s performance

MPF: >60% invested in equities

Other equities 27%

Debt Securities

19%

Deposits & Cash 16%

Hong Kong equities

38%

The MPF System (September 2015)

Equities 40%

Others60%

Private pensions in OECD countries (2012)

24

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

12

.20

00

-3.2

00

2

4.2

00

2-3

.20

03

4.2

00

3-3

.20

04

4.2

00

4-3

.20

05

4.2

00

5-3

.20

06

4.2

00

6-3

.20

07

4.2

00

7-3

.20

08

4.2

00

8-3

.20

09

4.2

00

9-3

.20

10

4.2

01

0-3

.20

11

4.2

01

1-3

.20

12

4.2

01

2-3

.20

13

4.2

01

3-3

.20

14

4.2

01

4-3

.20

15

4.2

01

5-1

1.2

01

5

Net Investment Return Annualized Internal Rate of Return

80

60

40

20

-20

-40

-60

-80

Yearly performance of MPF H

K$

bill

ion

Highest：30.1%

SARS

25

Financial Tsunami Lowest: -25.9%

Annualized Internal Rate of Return

Period

（$million）

Annualized Internal

Rate of Return

Net Asset Values Total Net

Contributions

during the Period

Net Investment

Return during the

Period

Period-

Beginning Period-End

(a) (b) (c) (b)–(a)–(c)

1.12.2000 – 31.3.2002 - 42,125 43,878 - 1,753 -4.9%

1.4.2002 – 31.3.2003 42,125 59,305 23,016 - 5,837 -10.7%

1.4.2003 – 31.3.2004 59,305 97,041 22,133 15,604 22.0%

1.4.2004 – 31.3.2005 97,041 124,316 22,205 5,070 4.7%

1.4.2005 – 31.3.2006 124,316 164,613 23,435 16,862 12.3%

1.4.2006 – 31.3.2007 164,613 211,199 24,684 21,901 12.4%

1.4.2007 – 31.3.2008 211,199 248,247 26,844 10,205 4.5%

1.4.2008 – 31.3.2009 248,247 217,741 38,503iv - 69,010 -25.9%

1.4.2009 – 31.3.2010 217,741 317,310 29,484 iv 70,086 30.1%

1.4.2010 – 31.3.2011 317,310 378,280 31,864 iv 29,106 8.7%

1.4.2011 – 31.3.2012 378,280 390,744 34,687 -22,224 -5.6%

1.4.2012 – 31.3.2013 390,744 455,331 38,321 26,267 6.4%

1.4.2013 – 31.3.2014 455,331 516,192 40,898 19,963 4.2%

1.4.2014 – 31.3.2015 516,192 594,847 44,126 34,529 6.4%

1.4.2015 – 30.11.2015 594,847 589,546 31,118 -36,420 -5.9%v

v

26

IX. Rates of return of different MPF funds differ

27

Fund Type

1 Dec 2000 – 30 Nov 2015

Annualized Return Cumulative Return

Equity Funds 4.1% 83.0%

Mixed Asset Funds 3.9% 77.1%

Bond Funds 2.8% 52.2%

Guaranteed Funds 1.3% 20.6%

MPF Conservative Funds

0.8% 12.9%

Money Market Funds 0.6% 8.8%

Returns of different types of funds

28

15-year annualized return of MPF funds by fund type

4.10% 3.90%

2.80%

1.30%

0.80% 0.60%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Equity Funds Mixed Assets Funds

Bond Funds Guaranteed Funds

MPF Conservative

Funds

Money Market Funds

29

83.00% 77.10%

52.20%

20.60%

12.90% 8.80%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Equity Funds Mixed Assets Funds

Bond Funds Guaranteed Funds

MPF Conservative

Funds

Money Market Funds

30

15-year cumulative return of MPF funds by fund type

X. Return figures vary even for the same type of funds

31

Performance depends on strategy and markets invest in

• Even for the same type of funds, the performance can vary significantly, depending on:

their investment strategy

the markets they invest in

• Example：

Fund Type 15-year Annualized Return

Asia Equity Funds 6.1%

Europe Equity Funds 0.9%

32

XI.

33

Funds with higher expected returns come with higher potential risks

Highest and lowest returns (Dec 2000 - Nov 2015)

Highest and Lowest Monthly Returns of MPF Funds (1 Dec 2000 - 30 Nov 2015)

Fund Type Highest Lowest

Equity Funds 15.39% -20.63%

Mixed Asset Funds 9.10% -13.70%

Bond Funds 4.31% -2.76%

Guaranteed Funds 1.58% -2.24%

MPF Conservative Funds

0.48% -0.05%

Money Market Funds 0.96% -0.93%

34

35

Cont’d

Highest and lowest returns (Dec 2000 - Nov 2015)

5.42%3.47%

1.15% 0.62% 0.19% 0.10%

15.39%

9.10%

4.31%

1.58%0.96% 0.48%

-20.63%

-13.70%

-2.76% -2.24% -0.93%-0.05%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Equity Fund Mixed Assets Fund Bond Fund Guaranteed Fund Money Market Fund

& Others

MPF Conservative

Fund

Mo

nth

ly R

etu

rn

Standard deviation of monthly returns Highest monthly return Lowest monthly return

XII. Diversified portfolios help reduce investment risk

36

Diversification

• Diversification across regions or asset classes may lower investment risk

• Volatility: Global equity funds ＜ Single market equity funds

37

6.00% 5.72% 5.20%4.39% 4.41%

17.82%14.63% 13.41%

10.94% 10.06%

-21.48% -20.23% -20.71%-17.87% -18.24%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Hong Kong Equity Funds Asia Equity Funds Europe Equity Funds North America Equity

Funds

Global Equity Funds

Mo

nth

ly R

etu

rn

Standard deviation of monthly returns Highest monthly return Lowest monthly return

XIII. Scheme members should review their MPF investments regularly

38

Review MPF regularly

• Review MPF portfolio regularly

• Take into account investment goals and risk-tolerance level and consider adjusting asset allocation approach

• Adjust the risk return tradeoff if appropriate

39

XIV

40

Past performance not indicative of future performance

XV. Default Investment Strategy to be launched at year end

41

Default Investment Strategy (DIS)

• Expected to be launched at the end of 2016

• Though its return not guaranteed, DIS is a simplified investment option and is consistent with the overall objectives of retirement savings

• Key features: Globally diversified investment strategy

Automatic de-risking with age increase

Statutory fee control (Fund’s management fee≤0.75% of fund’s net asset value)

42

Conclusion

43

• System level:

The MPF is a long-term investment, its return is characterized by the

compounding effect

MPF funds invest in financial instruments in the market, and a high

proportion of the MPF assets are invested in equities, which means the

performance of the equity market has a great impact on the System’s

performance

The System’s return does not represent what individual scheme members

will get

The MPF System as a whole has added value to scheme members’

retirement savings

44

• Individual level:

Each scheme member has a different investment portfolio,

and his savings outcome hinges on his investment

decisions

Different funds have different returns, so comparison

should be made with the same type of funds

Even funds of the same type have different returns

Past performance is not indicative of future performance

Cont’d Conclusion

Tips for managing MPF

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1 2

3

46

Cont’d

4 5

6

Tips for managing MPF

Tools for managing MPF

• The MPFA website has: Various platforms providing information:

Fee Comparative Platform

Low Fee Fund List

Trustee Service Comparative Platform

Detailed information on MPF investment

Tools to help scheme members calculate their retirement needs

• Newly launched retirement planning mobile application

47

Q&A

48