HONG KONG - The regulations for Hong Kong's recently passed Mandatory Provident Fund won't appear for another two years at least. Nonetheless, aggressive fund managers are preparing for what is anticipated to be a major event in the market place.
For example, Fidelity Investments and Barclays de Zoete Wedd Investment Management Hong Kong are adapting existing programs to sell funds that will comply with MPF legislation.
Other fund managers such as Jardine Fleming Investment Management Services, Schroders Investment Asia, HSBC Investment Funds (the big three in the market) and Citibank Global Asset Management say the time is not ripe for creating new funds during this wait-and-see period before the regulations come out.
The provident fund law will require employers to provide retirement plans for full-time employees ages 18 to 65. Management and workers will each contribute 5% of the employee's salary. MPF plans will be trust-based private sector plans; trustees will choose the investment managers.
But with the MPF market expected to have a cash flow of HK$40 billion (U.S.$5 billion) a year, some managers already are jockeying for position.
Executives at Fidelity Investments are betting the Fidelity Advantage Portfolio will work under whatever regulations are established for the MPF schemes. The portfolio was created to comply with the 1993 Occupational Retirement Schemes Ordinance. When the MPF regulations are complete, Fidelity expects to use the Advantage Portfolio as a framework and create others under the same umbrella. It is flexible enough to adapt to subsidiary MPF legislation, said Richard Darke, Fidelity's managing director for institutional business."There's business out there. The MPF will significantly increase cash flows into industry.....this fund is our vehicle to manage that growth," said Mr. Darke.
While Fidelity and BZW are expected to be significant players in the new field, assets are expected to be concentrated among Jardine Fleming, Schroders and HSBC.
Industry groups estimate HK$120 billion is managed in the territory now, with cash flows of HK$10 billion a year. When the MPF legislation takes effect, cash flow is estimated to increase to HK$40 billion a year.
The MPF will bring a smaller client to the market so there will be scope for other players, especially if administration is being offered as part of the package, said Patrick Tuohy, a principle with The Tresidder Tuohy Group, a financial consultancy.
BZW launched three products designed for medium or small pension funds two years ago. At the time, the firm had been managing the top end of the market but saw a niche in the smaller end that they are prepared to service with their conservative, balanced and growth funds.
BZW is looking for companies of more than 100 employees, the top end of the small-company market, said Alan Liu, director, Barclays de Zoete Wedd Investment Management Hong Kong. Acknowledging that other fund managers have launched quite a few new vehicles, he sees no need to create any at the moment. After the subsidiary legislation comes out, most companies will launch similar funds, Mr. Liu observed.
William Cheng, director, Schroders Investment Asia, confessed he was "quite puzzled" about how to proceed. Reading the text of the MPF law, he learned "the only thing relating to fund managers is investment restrictions. All we can do is to try to capture the present market in accordance with ORSO, but we can't do anything about MPF," he said.
So far, Schroders does not have a full product range ready to launch. While Mr. Cheng saw the benefits of launching an umbrella fund, operational issues pose hindrances he would have to work out with the company's administrative agency. They will probably introduce a product similar to Fidelity's next year, giving the client flexibility of choice.
Schroders is not intent on isolating a market segment; instead, it will try to "capture the whole market," Mr. Cheng said.
In February, Citibank launched a flexible package of retirement services in Hong Kong "in view of the need for professional advice," following the introduction of ORSO, officials said.
Citibank Retirement Services helps employers register their retirement plans in compliance with ORSO and to prepare and structure their retirement benefits funds accounts. The head of the unit which manages these plan, Andrew Au, said Citibank Retirement Services offer employers a final salary scheme, a provident fund, and guaranteed contributions. However, Mr. Au would not discuss the company's plans for MPF plans, except to say the legislation has created a priority for the pension fund business.
While the industry is not ready to jump feet first into MPF-compatible funds, Desmond Chan, director, Jardine Fleming Investment Management Services, noticed the industry is launching new products in terms of risk profiles rather than country stock funds.
It is likely that funds created to satisfy MPF legislation will adhere to the same mold.
Bob Duggins, chief executive of HSBC Investment Funds, observed that because the MPF legislation is limited to the first HK$20,000 (U.S.$2,460) of monthly income, there will be a considerable supplementary market above. Employers trying to comply with MPF will add supplementary funds on top for those who earn more than the minimum prescribed by legislation.
Providers are trying to assess for which segments of the market they will try positioning themselves, said Mr. Duggins. The employee's salary will indicate the degree of sophistication and choice that providers will offer.
"Options may have to be clearly defined, with easy choices for the lower end of the market. The upper end may have greater variety of choice," he predicted.
In the meantime, existing schemes need to be in compliance with MPF law when it comes into effect. Voluntary schemes for those earning HK$12,000 to HK$14,000 cover 35% of the workforce and will have to be amended to comply with basic MPF provisions. This exercise will have to be easy for employers. Mr. Duggins said it is unlikely employers will add separate schemes on top of voluntary schemes to meet the requirements.
