COVID-19 Crisis Managing Your MPF Investments During the - Willis Towers Watson
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Issue no. 38
April 2020
A balanced perspective on your MPF
Managing Your
MPF Investments
During the
COVID-19
Crisis The emergence of COVID-19 in
December 2019 and the subsequent
global spread of the virus have prompted
strong reactions from financial markets
over the last few weeks.Managing Your MPF Investments During the COVID-19 Crisis
Equity markets experienced a sizeable spike in volatility in March, and one of the steepest declines on
record. During the 1st quarter of 2020, global equities fell by about 21%. Global bond markets were also
affected, but to a lesser extent. Below are some market return statistics:
Monthly Market Returns
10%
5%
0%
Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20
-5%
-10%
Global Equities (DM+EM) Global Bonds Hong Kong Equities
MSCI ACWI BCGA FTSE HK
-15%
Source: Bloomberg, Willis Towers Watson
MSCI ACWI = MSCI AC World Index (in USD, total return, net dividend)
BCGA = Bloomberg Barclays Capital Global Aggregate Index (in USD, total return, unhedged)
FTSE HK = FTSE MPF Hong Kong Index (in HKD, total return, net dividend)
It is likely that market volatility will remain elevated for some time, linked to the acceleration/deceleration in
infection rates of the coronavirus, and the gradual release of economic data from those regions affected.
Indeed, it is possible that markets will experience another drawdown in the near term before a recovery takes
place.
How have policymakers responded?
Largely, aggressively and quickly, e.g.:
．Central banks cutting interest rates, pledging near unlimited liquidity and providing lending facilities directly
to corporates and small-medium size enterprises to ensure they have access to short-term cash flow;
．Governments announcing large scale measures to provide income support directly to citizens via improved
unemployment benefits, subsidized wages, temporary tax relief measures and in some cases debt
forbearance; and
．Countries implementing strict containment measures to slow down infection rates and allow time for their
health systems to better cope and prepare for growing numbers of citizens requiring acute medical treatment.
Taken altogether, the actions of policymakers have helped to stabilize financial markets. Equity markets have
recovered some of their losses since the market lows observed in mid-March.
What should you be thinking in this environment?
As an MPF member, you are building up wealth to support your future retirement needs. We would suggest
the following steps for you to understand your current position and plan your actions.
P.1Understand your risk tolerance
Think about what type of investor you are:
Your risk tolerance may be higher if Your risk tolerance may be lower if you
you have a longer investment horizon. have more liabilities (e.g. loan or mortgage
Young members will generally have a payments) because you would have less
higher risk tolerance.
Investment Liability flexibility to invest your cash or capital.
Horizon Profile
Ability to
Your risk tolerance level may be higher Risk Your risk tolerance may be lower if you
Accept
Appetite
if you are more willing to take risk in Losses rely on your investments for immediate
exchange for potentially higher use (e.g. living expenses) and you cannot
returns. withstand investment losses.
Note that, in general, a higher risk tolerance would imply a higher holding in equities and
potentially higher returns in the long run.
Do your MPF savings reflect the type of investor you are?
This is a perfect time to review your MPF investments via your MPF provider’s website. Compare your
allocation to equities, bonds and cash and see if this ties in with the type of investor you are, e.g. if you have
a low risk tolerance, your investments should, in general, be geared more towards bonds and cash.
Don’t panic and be tempted to switch if your investment strategy is on track
In market downturns, investors too often sell assets to cut losses, or because they intend to buy them back
at even lower prices, only to end up “selling low and buying high”. History tells us that markets can and will
eventually recover. Now is not the time to panic and sell assets at lower prices if your investment strategy is
aligned to your risk tolerance. If your investment strategy needs adjusting, you may adjust gradually over
time to reduce the timing effect.
Your future contributions play an important role too
Regular contributions will help you through “dollar-cost averaging” (see MPF Classroom on Page 4) –
monthly contributions can take advantage of market downturns to invest at lower prices, thereby benefiting
from a long-time horizon and a recovery in market pricing.
MPF members closer to retirement will have seen the value of their savings reduce and may feel anxious.
Those who are not already in lower risk or defensive strategies may consider it appropriate to reduce
investment risk over time. For members who are invested in target date or the MPF Default Investment
Strategy (DIS), this happens automatically on an annual basis, and no action is required.
Regardless of market conditions, you should review your MPF investment strategy regularly
to ensure that it remains aligned to your risk tolerance level and personal circumstances.
P.2Highlight of MPF performance up to 31 March 2020
The annualised performance over 1-year and 5-year periods ended 31 March 2020 of each MPF fund type
was as follows:
Performance ended 31 March 2020 1-year period 5-year period
Fund Fund type Highest Average Lowest Highest Average Lowest
category % p.a. % p.a. % p.a. % p.a. % p.a. % p.a.
Equity content > 80% funds -10.1 -12.8 -17.3 1.6 0.2 -0.6
Mixed Equity content 60% - 80% funds -6.9 -9.4 -15.7 2.1 0.6 -2.7
Assets
funds Equity content 40% - 60% funds -3.8 -5.5 -9.1 2.2 1.0 0.1
Equity content 20% - 40% funds -0.7 -2.3 -5.9 2.0 1.1 0.2
Default Core accumulation funds -2.7 -4.8 -5.7 n/a n/a n/a
Investment
Strategy Age 65 Plus funds 4.3 3.6 2.4 n/a n/a n/a
funds
Hong Kong equity funds -9.5 -14.1 -16.4 2.7 0.8 -1.7
Hong Kong equity (Index Tracking) funds -14.4 -16.4 -16.9 1.6 1.2 0.3
China equity funds -7.7 -11.2 -14.2 1.6 0.0 -3.0
Greater China equity funds 1.6 -5.1 -11.5 5.3 2.4 0.6
Asian ex Japan ex HK equity funds -14.6 -17.9 -23.5 1.0 -1.6 -6.9
Equity Asian ex Japan equity funds -9.7 -17.1 -26.5 0.4 -0.8 -4.1
funds
Pacific Basin ex Japan equity funds -2.9 -16.0 -21.4 1.5 -0.7 -2.4
Global equity funds -8.2 -13.5 -19.1 2.6 0.3 -3.1
United States equity funds -3.8 -10.4 -16.9 6.6 3.8 2.3
European equity funds -5.7 -17.9 -25.3 0.0 -2.9 -5.9
Japanese equity funds -7.0 -10.5 -13.4 0.4 -1.1 -3.0
Hong Kong Dollar bond funds 5.5 4.9 3.3 2.3 1.9 1.4
Asian bond funds 2.1 0.7 -1.3 1.4 1.2 1.0
Bond
funds Global bond funds 6.0 2.9 -1.7 2.7 0.9 -1.5
RMB bond funds -0.4 -1.4 -1.9 1.3 0.2 -0.2
MPF conservative funds 2.2 1.2 0.3 1.4 0.5 0.1
Money
market Hong Kong Dollar money market funds 1.7 1.6 1.4 0.7 0.6 0.6
funds
RMB and HKD money market funds -2.1 -2.5 -3.2 0.7 0.0 -0.6
Others Guaranteed funds 3.1 -0.3 -3.8 2.8 0.4 -1.0
Source: Lipper
Data as at 31 March 2020
Disclaimer: The information and data included in this table are provided for general information purposes only and do not constitute investment
advice, nor should they be construed as an offer or solicitation or recommendation to invest in or deal in any scheme, fund, product, service provider
or service referred to. As such, the information provided should not be relied upon for any investment or other financial decisions and no such
decisions should be taken without seeking specific professional advice. Any use of or reliance on any information or materials contained herein is
entirely at the reader’s own risk and Willis Towers Watson and its affiliates accept no responsibility and will not be liable for any consequences
howsoever arising from any such use or reliance. In addition, please be reminded that past performance is not an indication of future performance.
P.3MPF
classroom
How to manage market timing risk? (Dollar Cost Averaging)
Don’t try to “time” the market, i.e. buy low and sell high, even the professionals have trouble doing this!
Over a long period of time, different asset classes exhibit different characteristics. Whilst we may have a rough
idea of the returns expected over a long period of time, no one can accurately tell the best time to move amongst
them, especially during a period of extreme market volatility such as the first quarter of 2020.
When you move your investments from asset class to asset class, there is always a risk that the value of your
investments falls after your move. So ask yourself – “can I really predict the peaks and troughs of the markets and
take on such a risk?”. One way to spread this market timing risk is to apply the Dollar Cost Averaging method.
What is Dollar Cost Averaging?
The idea is simple – you invest a set amount of money at regular intervals in a particular investment, regardless of
the price. Using this approach, the price at which you buy the investment will average-out regardless of whether
the market is up or down. Note that the dollar-cost averaging approach should be used over an extended time
period in order to reap the full benefit.
An example based on units purchased in an investment fund during a period of market downturn and a total
investment of $6,000:
Disciplined Investment Market Timing
(with dollar-cost averaging) (without dollar-cost averaging)
Period Unit Price Amount Invested Units Purchased Amount Invested Units Purchased
1 $20 $1,000 50 $6,000 300
2 $10 $1,000 100
3 $15 $1,000 66
4 $10 $1,000 100
5 $20 $1,000 50
6 $20 $1,000 50
TOTAL $6,000 416 $6,000 300
Disciplined Investment Market Timing
(with dollar-cost averaging) (without dollar-cost averaging)
Avg unit price = total amt invested ÷ total units purchased Avg unit price = total amt invested ÷ total units purchased
= HK$6,000 ÷ 416 = HK$6,000 ÷ 300
= HK$14.42 = HK$20.00
Actual gain = (latest unit price ÷ avg unit price) – 1 Actual gain = (latest unit price ÷ avg unit price) – 1
= ($20 ÷ $14.42) – 1 = ($20 ÷ $20.00) – 1
= 39% = 0%
Trying to time the market to improve returns introduces additional risk. Regular contributions into your MPF
scheme allows you to practice dollar-cost averaging to mitigate market timing risk and average out the cost of
investments. It also takes the hassle and anxiety away from having to closely monitor the market.
Remember, saving for retirement is a long-term investment. The best way to avoid unintended additional risk is to
understand your needs, formulate the appropriate strategy, stick with it and review it when there are changes in
your circumstances.
About Willis Towers Watson
Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into
a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design
and deliver solutions that manage risk, optimise benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and
individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives
business performance. Together, we unlock potential. Learn more at willistowerswatson.com
Copyright © 2019 Willis Towers Watson. All rights reserved.
P.4You can also read
