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The Remarkable Report Card of the MPF Default Investment Strategy (DIS)

By Elaine Hwang | October 25, 2022

The Default Investment Strategy (DIS) was officially launched in 2017. Over the past five years, it has become a fundamental part of the MPF.
Retirement
MPF

As at June 30, 2022, the total assets invested in the two component funds making up the default investment strategy amounted to approximately HK$78 billion, accounting for 7.4% of all MPF assets. Of this amount, about a quarter of the account holders are invested in the default investment strategy itself.

Makes life easier in terms of investment fund selection

One of the main purposes of launching the default investment strategy was to assist members who are not prepared or able to make fund choices or who have no time to actively manage their MPF funds. Since 2017, all MPF providers are required to offer a DIS arrangement, which is a mix of two constituent funds, the "Core Accumulation Fund" and the "Age 65 Plus Fund". According to a member’s age contributions are invested in line with the DIS strategy. Between 50 and 65 years, DIS automatically reduces the funds invested in the riskier fund - "Core Accumulation Fund" and increases the funds allocated to the less risky fund - "Age 65 Plus Fund". This is done progressively each year, the idea being to gradually reduce investment risk in the period prior to retirement.

Automatically invests asset in the absence of specific investment instructions

If a new hire does not provide a valid asset allocation instruction when the member joins their employer’s MPF, their MPF contributions will automatically be invested in the provider’s DIS. Alternatively, members are able to make the active decision to invest in one or both of the DIS funds according to their own personal preference. If one does this, a member’s funds will not be automatically switched between funds in the period before retirement.

Average expense ratio is only 0.79%

Low fees are one of the reasons why DIS may be attractive to members who make the active decision to invest in the DIS funds. As at June 30, 2022, the average expense ratio of all providers’ DIS funds was only 0.79%, which is lower than the overall average expense ratio of MPF funds of 1.38%.

Outperforming equity funds and mixed asset funds

DIS funds invest in different asset classes across global markets, so the investment in the Hong Kong market is lower than some other similar funds. This investment approach helps to diversify investment risks, while it also provides fund managers with more investment options, potentially helping to improve returns.

In fact, the return of the DIS has generally been quite remarkable to date. The “Core Accumulation Fund” which has a heavier weighting to equities, has achieved a median five-year return of 4.0% per annum as at June 30, 2022. This is higher than the 1.8% per annum average inflation rate experienced over the last ten years. It is also higher than the median mixed-asset fund return, with similar asset allocation, of 2.2% on average over the same period. Even the less risky constituent fund - "Age 65 Plus Fund" has a five-year average return of 1.3% per annum. One of the reasons is that the Hong Kong equity market has not performed as well as other regional equity markets in recent years.

Neglecting the market and economic conditions

DIS still has certain limitations. The asset allocation only considers a member’s age. It does not consider the retirement savings goals or actual risk tolerance of a member, nor does it take into account market and economic conditions, etc.

The MPF provides a retirement savings framework for members from different backgrounds and with different levels of investment knowledge. Indeed, in the past 5 years, DIS has helped members in the area of the allocation, particularly those do not have the knowledge or time to make investment decisions. Although DIS is characterized as the “Lazy Fund", we would encourage members to take the initiative to understand more about the characteristics of the DIS and its two component funds.

This article in English and Chinese is available for download.

Author

Head of Retirement, Hong Kong & Macau

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