Should you add more to your MPF?

Some time ago I wrote that Hong Kong is an attractive place to be an investor, and suggested that regular purchases of the Hang Seng Index (HSI) is an easy way to make a simple investment. This month in my bank's MPF (Mandatory Provident Fund) newsletter, I see they want me to add extra personal contributions to my MPF each month as a way to save. It uses their Hang Seng Index Tracking Fund as an example, but as we'll see there are more cost-effective ways to invest in the HSI.

It's the second first time I've heard of these personal contributions. Late last year the bank sent two smartly dressed 'consultants' to visit our office and 'review our MPF contributions to date'. That didn't take long, as they just handed out printed summaries of our accounts, and congratulated us that the value had gone up. Their real reason to visit was to introduce MPF personal contributions, and try to sign us up for a monthly contribution.

It certainly looks good on paper. There are no initial charges to buy units of their MPF funds (so all your money goes into the funds), and if we compare the price of the fund against the Hang Seng Index that it is supposed to track, it looks even better:

Hang Seng Index (HSI) MPF HSI Tracking fund
1 Dec 2000 14,441 10.00
31 Jul 2006 16,971 12.74
% increase 17.5% 27.4%
Compound annual increase 3.1% 4.8%

So the MPF fund is growing 1.7% faster than the HSI each year. If you keep making an extra 1.7% per year, then over tens of years it will add up to a significant chunk of extra cash.

But given that Banks usually act with their own interests at heart, where's the catch? After all the bank also charges me 1.95% each year to manage my MPF fund, so where does this extra money come from?

Dividends. The number we're missing from the figures above are the dividends that are paid to shareholders each year by the companies who make up the Hang Seng Index. The exact amount varies, but a rough average is around 3% each year. If we look at the example above, we see the bank charges us 1.95% each year, and was able to add 1.7% to the value of the fund, so the dividends around that time would have been appx 3.65%, (1.95% + 1.7%). Let's do a little extra work ourselves, and see if we can keep all the dividends in our own account where they belong, instead of paying them to the MPF administrators.

I can open a monthly investment plan at my bank, and tell them to buy the $1,000 of Tracker Fund shares (often abbreviated to 'TRAHK') each month. The Tracker fund is bought and sold like a share. Its price follows the HSI almost exactly, and it also pays out dividends twice a year. The bank willl charge me $50 a month per purchase, and $30 or 0.5% (whichever is greater) on every dividend payment they process. BUT, there aren't any other annual fees, and that makes a big difference over time.

Let's look at an imaginary 10-year period where the HSI is growing at 3.1% each year, and compare the returns we'll make. We already know the MPF fund will grow at 4.8%. Then the Tracker Fund follows the HSI and so grows at 3.1% each year, but I'll also receive a dividend payments of 1.5% every 6 months. Let's assume that I reinvest the dividend payments to buy additional Tracker Fund shares. Here are the total returns, with the first three columns assuming I pay in $1000 each month.:

1 year 1.7% 2.6% 2.1% 2.7% 2.8%
3 years 4.9% 7.6% 8.4% 9.4% 9.5%
5 years 8.2% 12.9% 15.4% 16.5% 16.6%
10 years 17.1% 27.8% 35.7% 37.0% 37.2%

So after 1 year, buying our own Tracker Fund shares hasn't made as much money as the MPF option, but from there on you can see it is a much better choice. Initially, those $50 and $30 fees to the bank are what are limiting our returns. But as our savings grow the dividends grow too, and the $30 fee has less effect. The other way to minimise the effect of the fees is to invest more each month, so that those fixed fees have less impact. The last two columns show what happens if you buy $5,000 or $10,000 of TRAHK each month, instead of $1,000.

(You might wonder why we said the HSI is growing at 3.1% per year, but after the first year no returns are greater than 2.8%. Remember that although we've paid in $12K, the payments were spread out over a year, so the later months will earn a lot less interest than the 3.1% annual rate.)

As always, any saving is better than none. If you have signed up to make additional personal contributions to your MPF, you've already made a good step in the right direction. However you'll earn more if you take the simple step to set up your own monthly investment plan, and so pay less administration fees to the bank.


Other information:
 - David Webb goes into greater detail about the effects of MPF's fees on savings.
 - Hang Seng Index data, including dividend yields.
 - Finally, in the earlier article I used 7% as an average annual increase for the HSI. Here is the table of returns updated to use 7% as the annual increase. You can see that the same patterns occur:

1 year 3.8% 4.7% 4.3% 4.8% 4.9%
3 years 11.2% 14.0% 15.1% 16.1% 16.2%
5 years 19.3% 24.5% 27.6% 28.8% 29.0%
10 years 43.4% 56.7% 67.6% 69.3% 69.5%


Which bank to use?

Hi there. Interesting article. Just wondering, which bank do you use to keep your investments in, MrB?

So far I've found Hang Seng Bank not bad, but I've heard that Wing Hang bank has pretty good rates. Any thoughts on HSBC, Citi, Bank of East Asia, ABN Amro?

Has DBS recovered from the deposit box scandel from a couple of years back?



I use Hang Seng too

Not really out of any careful choice though. I've used them for banking for a long time, and so when I started buying shares I used them for that too. I've recently started a 3-month subscription with Quam to get better financial information about local companies, but still use Hang Seng for buying & selling.

If you do find any significant benefits in switching to another bank / broker, please let us know.

Regards, MrB