The Mandatory Provident Fund (MPF) programme has long been under fire for its combination of meager employer contributions, exorbitant fees, and lackluster returns. Few were surprised when it was reported earlier this month that in the fifteen years since inception, MPF companies had raked in almost $70 billion in fees while delivering mediocre returns, effectively pocketing 38 cents for every dollar earned, according to one particular measure. MPF managers will be quick to point out that investment prowess does not come cheap, and there are costs associated with attracting and retaining talented investment managers to decipher market trends and research stock-picks.

Photo: Apple Daily.

On the surface, at least, it seems like a fair argument. There are bound to be operational costs with running an investment fund, regardless of whether performance goes up or down. What if, however, there were MPF products that don’t need to hire portfolio managers and market analysts at all?

There currently exist several dozen MPF schemes that are so-called “index-tracking funds”. Rather than seeking to beat the market by investing in the right companies or regions, these products aim to mimic a stockmarket index such as the Hang Seng Index. These “copycat” strategies do so not by invoking some financial engineering wizardry, but simply by investing all their money in a single instrument – The Tracker Fund of Hong Kong (ticker code 2800).

The Tracker Fund of Hong Kong replicates the ups and downs of the Hang Seng Index and is listed on the Hong Kong Stock Exchange, so it can be readily traded by anyone with a stock brokerage account. More importantly, it only charges a 0.10% fee each year. In contrast, index-tracking MPF products charge 0.72% to 1.05% in annual fees. They buy an existing product, mark up its price almost tenfold, and then sell it back to pensioners, pocketing the difference.

Photo: Jacob Edward, via Flickr.

Pocketing ninety cents for every dollar charged is outright fraudulent and cannot be justified on the basis of costs. These MPF funds hardly have any cost – they do not require investment insight, portfolio management skills, or any decision-making processes. Index-tracking MPF products simply channel money from investors to the Tracker Fund of Hong Kong. As the cliche goes, it is a job so simple that even a monkey can do it.

MPF providers do not try to hide this fact. Their fund prospectus documents clearly state that the index-tracking fund does one thing and one thing only:

BCOM HSI Tracking (CF) Fund: The constituent fund will entirely invest in an approved index-tracking collective investment scheme (ITCIS), Tracker Fund of Hong Kong.

BCT (Pro) Hang Seng Index Tracking: …investing solely in a single Index Tracking Collective Investment Scheme (ITCIS) (currently, the Tracker Fund of Hong Kong.

BEA Hong Kong Tracker Fund: Invest directly in a single Approved Index-Tracking Fund, namely the Tracker Fund of Hong Kong.

BOCI Prudential Hong Kong Tracking Fund: …will seek to track the performance of the Hang Seng Index of Hong Kong by investing into the Tracker Fund of Hong Kong.

Fidelity Retirement Master Hong Kong Tracker: …investing all or substantially all of the fund assets into the Tracker Fund of Hong Kong.

Invesco Strategic MPF Hang Seng Tracking Fund: To invest directly in a single approved index-tracking collective investment scheme, namely, the Tracker Fund of Hong Kong.

Principal Hang Seng Index Tracking Fund: To invest solely in a single Approved Index-Tracking Fund, the Tracker Fund of Hong Kong.

There is no mention that the Tracker Fund of Hong Kong is one-tenth the cost of their MPF product.

Exactly how much money is siphoned away from pensioners each year from unscrupulous pricing? At the end of 2015 there was roughly $45 billion invested in index-tracking MPF products, out of about $560 billion in the aggregate MPF market. By looking at how much each MPF fund charges compared with its cost of 0.10%, one can approximate how much these companies are “pocketing”:

MPF Scheme Fee Assets Under Management ($ millions) Pocketed ($ millions) BCOM (Joyful) – HSI Tracking (CF) Fund 1.03% $203.50 $1.89 BCT (Pro) – Hang Seng Index Tracking Fund 0.91% $1,032.40 $8.36 BEA (Industry) – Hong Kong Tracker Fund 0.72% $5.65 $0.04 BEA (Master) – Hong Kong Tracker Fund 0.80% $87.10 $0.61 BEA (Value) – Hong Kong Tracker Fund 0.72% $23.51 $0.15 BOCI-Prudential (My Choice) – Hong Kong Tracking Fund 0.73% $75.74 $0.48 Fidelity (Master) – Hong Kong Tracker Fund 0.80% $234.87 $1.64 Hang Seng (SuperTrust Plus) – Hang Seng Index Tracking Fund 0.94% $4,033.04 $33.88 Hang Seng (SuperTrust) – Hang Seng Index Tracking Fund 0.95% $5,113.04 $43.46 Hang Seng (ValueChoice) – Hang Seng Index Tracking Fund 0.93% $81.83 $0.68 HSBC (SuperTrust Plus) – Hang Seng Index Tracking Fund 0.94% $13,764.53 $115.62 HSBC (SuperTrust) – Hang Seng Index Tracking Fund 0.95% $17,680.30 $150.28 HSBC (ValueChoice) – Hang Seng Index Tracking Fund 0.93% $639.69 $5.31 Invesco (Strategic) – Hang Seng Index Tracking Fund 0.88% $108.12 $0.84 Manulife (Global) – Hang Seng Index Tracking Fund 1.03% $1,473.10 $13.70 Principal (600) – Hang Seng Index Tracking Fund 1.05% $181.70 $1.73 Principal (800) – Hang Seng Index Tracking Fund 1.05% $377.40 $3.59 Total $45,115.52 $382.25

Sources: Mandatory Provident Fund Schemes Authority (MPFA), MPFExpress.com, FE Trustnet Hong Kong

MPF index-tracking funds pocketed $382 million in 2015 for doing, quite literally, nothing. The lion’s share of this loot goes to HSBC and Hang Seng, by far the two biggest swindlers. Allowing MPF companies to charge a dollar for buying a product on their pensioners’ behalf that only costs 10 cents is blatant regulatory failure and further evidence of collusion between policymakers and big businesses.

Disclosure: The author neither owns nor intends to buy/sell shares of The Tracker Fund of Hong Kong or any of the aforementioned MPF schemes.