Relative to overseas stock markets, the performance of the Hong Kong stock market has been relatively lackluster in recent years, sparking interest among many Mandatory Provident Fund (MPF) members to consider investing in overseas markets. This has coincided with a number of articles and discussions about the importance of diversification generally. In fact, the regional distribution of MPF equity assets is now quite international, with the latest overseas market equity allocation exceeding two-thirds.
The Mandatory Provident Fund Schemes Authority (MPFA) shows the regional distribution of MPF assets invested in equities in its quarterly reports. As of June 30, 2024, the allocation to Hong Kong was 31%, lower than the top-ranked North America (37%), followed closely by Asia at 20%, while Europe stood at 12%. Contrasting these statistics with the quarterly report from three years ago on June 30, 2021, the allocation to Hong Kong stocks was 54%, with Asia and North America at 18% each, and Europe at only 10%. There has been a significant shift in equity distribution over this three-year period.
Varying performance in stock markets around the world
Changes in the regional distribution of MPF assets undoubtedly correlate with stock market performance. The stock markets in most of Europe, the Americas, and the Asia-Pacific region have all outperformed the Hong Kong stock market in recent years. At the same time, the internet provides members with faster and easier access to information on overseas markets, including investment performance. This has increased awareness of various overseas stock markets and has led to a greater focus on overseas investment opportunities offered by many MPF providers. As a result, some members have taken steps to adjust their investment portfolios, resulting in a change in asset allocation.
Considerations for exchange rates and management fees
From a portfolio management perspective, investing in overseas equity funds can provide better diversification and helps to enhance long-term risk management. However, investing in overseas markets also requires consideration of additional factors, especially exchange rate risks. Overseas currencies and fiscal policies can affect exchange rates when compared against the Hong Kong dollar. Additionally, due to the complexity of fund management and the broader investment resources required, fund management fees for overseas funds are generally higher.
Pay attention to the selection of overseas funds
When members consider how best to allocate their MPF funds including future MPF contributions, they should pay attention to whether their MPF provider offers any overseas equity funds. In general, most providers offer options such as global equities, North America/US equities, and Asian equities. For global equity funds, it's important to note that the allocation to different regions like North America/US, Europe, and Asia may vary from provider to provider. For Asian equity funds, check to see if they include Japan – some do and some do not. Also note that not all trustees offer European equity funds or Japanese equity funds.
Although investing in overseas markets has become an important topic in recent years, members must take into consideration their risk tolerance level and their ability to withstand volatility and performance variations over time.