MPF Investors Earn 4.4% in Q1

Europe Outperforms Despite Lingering Risks

European markets outperformed other regions in the first quarter of 2023, even as they continued to battle with the lingering Russia-Ukraine war, energy crisis, and surging living costs. 2022’s drastic underperformance recorded in 2022,  triggered by a confluence of macroeconomic and geopolitical crises, has allowed for a rebound in the opening days of 2023. MPFs investing in European equities gained 11.6% on average.

U.S. equity funds were the second-best performers, with a quarterly gain of 8.6%. The market’s focus was initially on the Federal Reserve’s next moves in tackling uncomfortably high levels of inflation and a red-hot job market. As the quarter headed into its final days, the collapse of Silicon Valley Bank stirred concerns about a credit crunch and investors’ focus shifted dramatically to the health of the banking sector.

Tech stocks were the outperformer in the first quarter, rallying on better-than-expected earnings results and demand, effective cost-cutting strategies, and enthusiasm for artificial intelligence. After brutal losses in 2022, these positive factors drove strong quarterly returns in tech-heavy Nasdaq. Comparatively, the S&P 500 index returned 7.03% while DJ Industrial Average was little changed. Global equity funds, which typically invest heavily in the U.S. markets, also benefitted and returned 7.9% on average.

China and Greater China equity funds also made it to the top five with a 5% return as the markets traded higher on recovery hopes and flipped from a whopping loss over the past two years. The key benchmarks gave up a small amount of the return from a reopening hype in the latter part of the first quarter as investors were seeking validations of actual economic improvements. Shanghai’s SSE Composite ended the three months up 5.94% and Hong Kong’s Hang Seng Index returned 3.13%.

Global Bonds Return 3%

The banking crisis in the U.S. began to unfold as crypto-friendly bank Silvergate Capital said it would wind down its operations after the collapse of crypto exchange FTX. Jerome Powell, chair of the U.S. Federal Reserve, told Congress that bringing down inflation “has a long way to go and is likely to be bumpy,” and the ultimate level of interest rates is likely to be higher than previously anticipated.

The next day, short-term yields peaked at 5.05%, marking the inversion between two- and 10-year Treasuries to its widest since September 1981, to negative 107 basis points. A flight to quality dragged yields on two-year bonds to 4.06% at the end of March. Shorter- and longer-term bond yields are below the level of the end of 2022 but still above where they were a year ago.

The FTSE WGBI rose 2.6% for the quarter (in U.S. dollars), versus a 2% loss from the fourth quarter. After the most recent hike of a quarter-percentage point, the target federal-funds rate reached 4.75%-5%, up from zero at the start of 2022. Global-bond MPFs returned 3.4%. Asian bond categories also generated around 3%, on average.

Best- and Worst-Performing Funds

Manulife GS MPF Euro Eq topped more than 400 other MPFs in the first quarter with a gain of 18.4%, beginning a recovery from its 2022 30% loss. Four other Europe equity funds were among the 10 best performers, with returns ranging between 11.1% and 14.8%. The other half of the top-10 list consist of three U.S. equity funds and two global equity funds.

Turning to the laggards, the only fund sliding in the red is a thematic fund, Manulife GS MPF Healthcare, down 2.35% in the past three months. The fund was the best equity performer in 2022. The remaining laggards for the first quarter were money market and guaranteed funds, though they were able to generate a small return.

Positioning for the Rest of 2023

Tak Chi Wong, deputy chief executive officer at Manulife Provident Funds Trust, thinks investors shouldn’t let their guard down for the volatility to come. Expectations for inflation rate and interest-rate trends have been pushed higher, which is a drastic shift seen over the course of one year . Worse still, the world is likely tipping into a recessionary period. How can MPF contributors defend their hard-earned retirement pot?

Wong says, “Contributions to the MPF scheme are a long game. Short-term volatility isn’t unseen for investments that could last three to four decades. We advise against switching funds when the market sentiment has been swung by events. Investors would have missed the recovery that might follow.” Here are four tips that Wong gives to MPF contributors:

1. Investment decisions should not hinge on short-term market moves and sentiment swings.
2. Enjoy the free lunch from diversifying your assets, especially but not limited to diversifying away from home assets.
3. Consolidate multiple MPF accounts into one for simpler access and regularly review your portfolio.
4. Lastly, stay invested.

Cashing out from the MPF scheme is not possible before a contributor reaches retirement age or meets certain conditions. While low-risk conservative and money market funds are the most akin to bank deposits among other fund products in the scheme, Wong believes the approach of staying invested should prevail.

He continues: “With a risk-averse allocation, you might have dodged the market risk, but at the expense of consistently underperforming inflation for the long haul.” A retirement pot that can beat the surging cost of living is technically defending the future value of your money, he says.

According to Wong, since the scheme’s launch in 2000, the annualized average return through 2022 is 2.4%, beating the inflation gauge in Hong Kong. There’s more to it. “Equity funds have been a driver of that return. An average equity portfolio returned 3.8% in the 20 years, outperforming the 0.6% gain per year by conservative and money-market funds,” he adds.

Allocating the MPF portfolios also involves individual factors. Wong says investors should view all assets—MPF, other savings, and investments—holistically in preparation for retirement and should seek help from financial advisors when encountering questions.