Trillion-dollar Strong Accumulation Fund - Hong Kong's largest long position has increased!

While mainlanders were celebrating the holiday, they may not have noticed this trend.

The Huaxia Hang Seng ESG ETF listed on the Hong Kong Stock Exchange received a large net inflow of funds on October 3, despite the market downturn. The latest net asset value surged from HKD 760 million on September 29 to HKD 7.44 billion, with a net inflow of nearly HKD 6.7 billion. This is the largest institutional investor subscription in Hong Kong in nearly a decade.

(Image source: Wind)

So who is this mysterious subscriber?

According to Huaxia Fund (Hong Kong), it is a leading MPF institutional investor in Hong Kong.

Is it BEA Mandatory Provident Fund Scheme, Sun Life MPF Master Trust Scheme, Manulife Provident Funds Trusts, or Principal MPF Scheme? Or is it AIA MPF Scheme or China Life MPF Master Trust Scheme? Regardless of which one it is, the significance of this move is not to be underestimated.

What is MPF? It refers to the Mandatory Provident Fund in Hong Kong, which is equivalent to the social security fund in mainland China.

The MPF system was officially implemented in Hong Kong in December 2000. It is a mandatory participation system where both employees and employers are required to contribute 5% of the employee's income to the MPF account within the income limits. Self-employed individuals also need to contribute 5% of their personal income. According to the relevant arrangements, Hong Kong residents can withdraw their MPF upon reaching the retirement age of 65.

The MPFA (Mandatory Provident Fund Schemes Authority) of Hong Kong released its "2022-2023 Annual Report" on July 30, which showed that as of the end of March this year, the total net assets of the MPF amounted to HKD 1.11 trillion, with net contributions of HKD 851 billion, accounting for 77%. Since the establishment of the MPF system, it has earned HKD 258 billion for contributors, providing important security for retirement in Hong Kong.

The MPFA has repeatedly emphasized that the MPF is a long-term investment spanning 40 years, and it adopts the "dollar-cost averaging" method for regular investment.

What is dollar-cost averaging? It can be simply understood as "buying less when the market rises and buying more when the market falls." The MPF's dollar-cost averaging method involves purchasing a fixed amount of fund units each month, regardless of the market price at that time. The number of fund units purchased through regular investment will vary depending on the market price, allowing for cost averaging, reducing investment costs and risks. As long as the investment projects do not continuously decline, profits can still be expected. Since the implementation of the MPF system, it has achieved an average annualized internal rate of return of 2.5%.

According to the information from the Hong Kong Mandatory Provident Fund Schemes Authority, as of the end of June 2023, equity funds accounted for over 43.3% of the total assets of the Mandatory Provident Fund (MPF), making it the most important asset class in the MPF system.

In terms of geographical distribution, 55% of the MPF funds are invested in Hong Kong (with 30 percentage points in the Hong Kong stock market), while 15% is allocated to Asia, and North America and Europe account for only 14% and 6% of the stock investments, respectively.

For Hong Kong residents, for every HKD 1 invested in the MPF, 30% is invested in the local stock market.

The performance of the MPF is closely related to the Hong Kong stock market. Over the past three years, the Hong Kong economy has been severely affected by the pandemic, and the stock market has been in a downward trend. Especially last year, under the combined impact of the fifth wave of the pandemic, the US interest rate hike, and international political factors, the Hang Seng Index fell below 16,000 points, halving its peak level. The MPF performed poorly, with a total loss of over HKD 2 trillion at one point, setting the worst record since the global financial tsunami in 2008, with an average loss of over HKD 60,000 per person. After November last year, Hong Kong entered a path of recovery, and the stock market quickly rebounded, leading to a recovery in the MPF. In 2022, the cumulative decline of the Hong Kong stock market was 15.5%, while the MPF's cumulative decline was 15.66%, showing a similar performance.

In January this year, with the surge in the Hong Kong stock market, the MPF's return rate for January was about 5.1%. Taking into account the MPF contributions in January and the estimated market returns, the average account balance of the 4.57 million MPF members in Hong Kong increased by about 7.84% compared to the previous month, with an average increase of HKD 18,000 per person. Hong Kong citizens received this generous "red envelope" for the new year.

In fact, under the current framework in Hong Kong, the investment portfolio of MPF contributors does not necessarily need to be concentrated in "Mainland China and Hong Kong equity funds", but can be transferred to stock funds in the US, Europe, Japan, and other regions with relatively significant growth.

Although Mainland China and Hong Kong equity funds did not perform well in the first half of this year, they still attracted the most inflows among the 17 fund categories.

Data shows that in the second quarter, Mainland China and Hong Kong equity funds contributed 23.1% of the net inflows among all MPF funds, with a total contribution of 28.8% in the first half of the year.

It can be said that Hong Kong citizens are undoubtedly the most loyal supporters of the Hong Kong stock market. This is clearly reflected in the allocation of the MPF.During the National Day holiday, the Hong Kong Stock Connect channel was closed. Without the support of mainland investors, the Hong Kong stock market experienced a sharp decline for two consecutive trading days but rebounded strongly. Behind this force, the increased allocation of Mandatory Provident Fund (MPF) may have played a role: in addition to the Huaxia Hang Seng ESG ETF receiving nearly HKD 6.7 billion in net subscriptions on October 3, the Hang Seng China Enterprises ETF managed by HSBC Investment Management also received over HKD 2.4 billion in net subscriptions.

From an objective perspective, the Hang Seng Index's forward PE ratio is currently at around 2%, which is the historical percentile value since 2013. The Hang Seng Index's PE ratio relative to the MSCI Global Index is at the historical percentile value of 7%. With such low valuations, the confidence of Hong Kong people remains strong, and everyone is looking forward to a rebound in the Hong Kong stock market.

The MPF, with a scale of over HKD 1.1 trillion, is an important force in the Hong Kong financial market. With more MPF funds entering the stock market, market confidence will be strengthened, the Hong Kong stock market will rebound, and the MPF will make profits, forming a virtuous cycle. Recently, Hong Kong government officials have established a special task force to improve market liquidity. For the Hong Kong SAR government, how to manage and utilize the MPF effectively is a topic that can continue to be explored and developed.