When low cost is very expensive

2020 has not been a year for faint hearted investors.  After a strong start, markets have been hit hard by the ongoing coronavirus pandemic. Those who believed things would get worse and tried to “market time” by switching from equities during the height of the uncertainty, have locked in losses which may take years to recover from.

Conversely, those who remained invested, and understood “time in markets” is a key factor in successful investing, were rewarded by August with every MPF asset classes now in positive territory (See Table 1), or so it seems. 

One thing that headline numbers don’t show is the story behind the story. The behind the scene story in 2020 is the performance variation between active funds and passive funds. 

Passive funds are often promoted better value than their actively managed counterparts by virtue of far lower costs and claims that even the best investment experts struggle to beat given benchmarks consistently, so why pay the higher fee?

But if there’s ever been a year where higher fees appear more than justified it’s been in 2020. While the year to date now sees all MPF asset classes in positive territory, when we peel back the performance, there has been a huge discrepancy between passive and active investment returns in Hong Kong and China equity performance.  We can see in Chart 2 that since the start of the year active managers have outperformed passive managers around 18%. Moreover, if one were passively invested, you are still in negative performance territory.

Like asset classes, there is no right or wrong investment approach, and no one investment approach works all the time. So as it is important to diversify assets in a portfolio so too is the importance to diversify approach and investment style, and the good news is investment tools such as www.mympfchoice.com allow users to identify fund types and investment styles, the combination of which improves long term wealth creation outcomes by assisting in the creation of better diversified portfolios.

Table 1: 2020 Year To Date Investment Returns By MPF Asset Classes

Source: MPF Ratings 

Chart 2: 2020 Year To Date Investment Returns of Active Funds vs Passive Funds of Equity Fund (HK & China)

Source: MPF Ratings

Scroll to Top