MPF passive performance shock

28 September 2020

Worst ever relative year-to-date returns decimate 10 years of outperformance

MPF’s obsession with low fees has been called into question by a leading independent provider of MPF research as 2020 sees passively managed funds record their worst ever performance compared to their active peers.

According to data obtained from MPF Ratings, the median difference between active and passive funds within Hong Kong/China equities, MPF’s largest fund category, so far in 2020 is 19.78% (See Chart 1), which according to MPF Ratings’ Executive Chairman, Francis Chung (叢川普) is without precedence. “The performance variation magnitude is staggering. Prior to 2020, MPF members who favoured passive funds over active funds would have been rewarded with consistent and long term outperformance (See Chart 2), but the unheralded relative underperformance of passive funds in 2020 has been so extreme that when the current 2020 results are included there is a complete turnaround. The long term benefits of investing passively have been completely decimated (See Chart 3).”

When asked how severe the underperformance had been and what MPF members can do about it, Mr Chung offered up the following, “Most active managers look to outperform benchmarks by 2% per annum on a rolling 3 year basis. On a similar basis, passive funds would have to outperform active funds for the next 9 to 10 years to recover the 19.78% difference.  This would be a herculean task.  The lesson this shocking performance differential should teach MPF members is that like asset classes, no one investment approach works all the time, so it’s important to diversify not only the assets one invests in, but also by investment style,” before adding bluntly, “Don’t let low cost fool you, in the long term low cost may prove very expensive.”

Chart 1: Cumulative 2020 Year-to-date median Active and Passive fund returns for Equity Fund (HK & China)

Source: MPF Ratings

Chart 2: Cumulative value of median Equity Fund (HK and China) Active Funds vs Passive Funds: 31 Dec 2009 to 31 Dec 2019

Source: MPF Ratings

Chart 3: Cumulative value of median Equity Fund (HK and China) Active Funds vs Passive Funds: 31 Dec 2009 to Present

Source: MPF Ratings

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