The dollar-cost averaging (DCA) and diversification investment approaches have proven advantages for Mandatory Provident Fund (MPF) members, according to data from the Hong Kong Investment Funds Association (HKIFA).
DCA strategy, which typically involves making investments on a regular basis, outperformed lump-sum investing (LSI) across the majority of HKIFA’s 26 MPF categories over 1-year and 3-year periods. DCA is embedded in the MPF system as employees make regular contributions to their MPF funds; and thus they are already availing of the benefits of DCA.
In recent years, some MPF members might not have fully captured the stellar returns delivered by the surging global markets as there is a concentration of MPF assets in the Hong Kong markets. This underscores the importance of portfolio diversification for risk management purposes as well as for access to more opportunity sets.
In the 12 months ending January 2024, 12 out of 26 HKIFA MPF categories posted positive returns. (Appendix Chart 1 – based on lump sum investments). The global equity markets have rallied, with U.S. and Japanese equities reaching new highs as fears of a global recession seem to recede. Japanese equity funds came first by returning an average 21.9% during the period, followed by U.S. equity funds and global equity funds.
In contrast, China and Hong Kong equities continued to post lacklustre returns amid concerns over China’s economy. Hong Kong and China equity funds saw an average 30.8% and 30.1% decline respectively in the same period. HKD bond funds, Asian bond funds, and global bond funds demonstrated resilience by rising 3.2%, 0.6%, and 0.06% respectively during the period. Lifestyle funds, with an investment mix of equities and bonds, dipped by a few percentage points.
Mr. Philip Tso, co-chair of the HKIFA Pensions Subcommittee, remarked: “In the Year of the Dragon, due to uncertainties in economic growth, interest rates, and geopolitical events, we expect to observe volatility in the markets. The implications of the November U.S. presidential election will further contribute to this mix.”
DCA Outperforming LSI
Comparing the returns by 1) a lump-sum investment at the beginning of the stated period; and 2) DCA with an HKD 1,000 contribution at the end of each month over the stated period, the latter yielded better average returns in the majority of the 26 HKIFA MPF fund categories over the 1-year and 3-year periods. (Appendix Chart 2)
Over the 1-year period as of January 2024, 17 out of 26 categories performed better by adopting DCA approach. Similarly, over the 3-year period, 20 out of 26 categories achieved outperformance with DCA.
“Investors often attempt to time the market, hoping to buy low and sell high. In reality, we might end up doing the exact opposite, as no one can predict future market movements. By adhering to a disciplined, effective, yet simple dollar-cost averaging investment strategy, investors can mitigate the impact of price volatility, and harness the power of compounding to achieve their financial goals,” Tso said.
While DCA helps people to make a disciplined investment approach and helps in smoothing out short-term volatilities, there are scenarios under which investing in lump sums may result in higher returns, e.g. when the market is rising.
Missed Opportunities in Global Markets
MPF members might have missed out on the latest bull run of the global markets, because there is a strong home bias. Hong Kong equities still accounted for 30% of MPF funds’ overall asset allocation, the highest amongst all categories, according to data from the Mandatory Provident Fund Schemes Authority (MPFA) as of June 2023. Deposits and cash levels were at 16%. (Appendix Chart 3)
“With the high interest rate environment over the last couple of years, many investors took a conservative approach to increase their cash positions. In this lunar year, we see opportunities in fixed income and equities that are likely to offer far better potential for total returns. We believe investors including MPF members should need to adopt an active approach and flexible mindset to make informed investment decisions,” Tso commented.
“Under the current environment especially on the geopolitical and macro aspects, MPF members should pay extra attention to possible volatility and exercise a diversified investment strategy (equities vs bonds, and within both asset classes as well) to manage the unexpected risks,” he added.
The MPF scheme offers a diverse range of fund options, allowing members to diversify their portfolios to reduce risks and potentially improve their returns in the long term. For example, the Default Investment Strategy (DIS) and lifestyle funds adopt globally diversified investment principles and invest in different asset classes.
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