Q3 2013 MPF Commentary

Despite the rampant belief of the U.S. tapering, the Federal Reserve surprised everyone in mid-September by announcing that they would continue their $85 billion per-month bond purchasing program. This news was welcomed by the market and sent the S&P 500 index soaring before it pulled back towards the end of the month due to concerns over the debt ceiling; the index ended the third quarter on a 4.67% gain compared to last quarter’s 2.28%. At the beginning of October, U.S. lawmakers failed to agree on a budget, causing a government shutdown – the first time in 17 years. This brings uncertainties to the economy at a time when the U.S. debt ceiling is soon expected to be reached and the failure to raise it can lead to further market volatilities.

Although tapering is temporarily off the table, the Fed has made it clear that they are ready to wind down the program if they see more evidence of a strengthening economy. Therefore, the market still broadly expects the Fed to dial back its quantitative easing program in the near future, and the 10-year Treasury yield has been gradually rising. With the U.S. being a major bond market globally, this has caused losses in international fixed interest, with the Barclays Global Aggregate index showing a loss of 2.11% year-to-date.

Rebounding strongly from a 0.59% loss in the previous quarter, the MSCI Europe index clocked a robust gain of 13.60% in Q3 of 2013. Europe appeared to move out of recession into a tepid recovery as the Eurozone’s second-quarter GDP turned positive for the first time since 2011, albeit at 0.3%. Other encouraging news included German Chancellor Angela Merkel’s re-election in September, which eliminated some political risks for the country. Research group Markit’s composite PMI showed an expansion in factory output and an uptick in business activity in the Eurozone. However, a number of threats to the region remain, such as the Greek debt crisis and the Italian political instability.

The CSI 300 index, representing the Chinese stock market, also rebounded from a 10.77% slump in Q2 to a 9.73% gain this quarter. In order to counter the slower growth in the previous quarter, the Chinese government increased infrastructure spending and other investments in the third quarter. Official PMI increased from 50.3 to 51.1 between July and September, indicating signs of life in the manufacturing sector. The positive market sentiment spilled over to Hong Kong, and the Hang Seng Index surged 9.89% in Q3 from its 6.71% loss in Q2.

MPF Performance

MPFs overall had a good quarter, with all of our 17 MPF categories averaging positive returns in Q3. Europe Equity was the strongest performing MPF category, posting an average return of 12.71%. Within the category, BCT (Pro) European Equity Fund was the top-performing fund, recording a 15.93% gain.

Hong Kong investors’ favourite MPF category - China & Greater China Equity – made a strong comeback against the backdrop of improving economic data and was the second-best performing category this quarter, up by 9.45% on average. In particular, Principal 800 China Equity D led the pack by registering an 11.17% gain. Similarly, Hong Kong Equity MPFs have pulled out of the red from the last quarter and rose by 8.89%, in which BEA (IS) BEA Hong Kong Tracker was the category winner for the quarter.

Japan Equity, the strongest MPF category in the first half of 2013, has been slightly overshadowed by the European and Chinese stock market rallies. Nonetheless, category return was up 6.68%, with AIA MPF – PVC Japan Equity being the top performer this quarter. This fund is also the best performer of the entire MPF universe so far in 2013, recording a staggering 32.14% gain year-to-date.

As the U.S. continues to grow at a slow and steady rate, MPFs which invest in U.S Equity have delivered a respectable average return of 5.50% in the third quarter. Mass MPF US Equity displayed impressive outperformance by gaining 10.63%. On the other hand, last quarter’s category leader – AIA MPF – PVC North American Equity, dropped to the bottom of the peer group. This highlights our belief that investors should not focus on short term performance.

Due to tapering expectations, Global Bond MPFs averaged a loss of 2.38% year-to-date. BEA Global Bond was the top performer, sliding by 0.96% over this period.

Although MPFs in general fared well this quarter on the back of signs of recovery in the major global economies, numerous uncertainties remain ahead. As always, we believe investors are best served to adhering to their long-term investment plans and avoid being swayed by short-term changes in the macroeconomic environment. Furthermore, investors should by no means rely on simple performance data when making investment decisions. A key factor to consider is fees, as high fees will certainly erode an MPF’s future returns potential. Different MPFs bear different degrees of risk; for example, equity funds are generally riskier than bond funds, and investors should select their MPFs according to their own risk appetite and tolerance.

Q3 2013 Best Performing MPFs by Category