Date
19 November 2017
The MPF could help finance the third runway at Hong Kong International Airport by buying an Airport Authority bond. Photo: pic.feeyo.com
The MPF could help finance the third runway at Hong Kong International Airport by buying an Airport Authority bond. Photo: pic.feeyo.com

Third runway could make good use of MPF resources

The Mandatory Provident Fund Schemes Authority (MPFA) intends to introduce a “core fund” as the standardized, low-fee, default investment for MPF holders after wrapping up a public consultation.

While it’s impossible to predict its investment return, ordinary citizens will benefit from the lower fees.

The management fee will be capped at 0.75 percent, so holders will pay only about 1 percent, including a 0.25 percent administration fee.

That will be much lower than the existing total fee of 1.65 percent.

The proposal has won general support from the public.

However, there are some people who are still unhappy with the plan.

Some say the MPF should not do anything complicated; instead, it should offer a steady annual interest rate or investment return.

However, if an overly conservative approach is adopted with a long-term investment, the return may fail to beat inflation.

Others say the authority should rebuild its model and require the government to act as the MPF’s trustee or investment manager. If so, the scale of the fund will be huge, which will naturally lower the management fee.

The MPF manages more than HK$500 billion, so the management fee can be reduced.

And if the government serves as the fund manager, that could set up the benchmarks for the industry for management fees and return on investment.

Private money managers who outperform will be able to lure more investors.

Meanwhile, the Executive Council has approved the Airport Authority’s proposal to build a third runway at Chek Lap Kok airport for HK$141.5 billion.

To fund the project, the authority plans to issue bonds, which could be an attractive investment for MPF investors.

That will create a win-win situation.

The bonds issued by the Airport Authority should be rated at AAA, the same as those of the government of Hong Kong. That sounds like a very stable investment.

The authority now pays an annual dividend of HK$5.3 billion to the government, its sole shareholder.

That amount will be diverted to fund the third runway, accounting for 3.7 percent of the construction expense.

The authority’s earnings could be paid as a bond yield to MPF investors.

Under the financing plan for the project, departing travelers will have to fork out an “airport construction fee” of about HK$180.

Based on the existing 57 million travelers a year, that would contribute a total of HK$10.2 billion per year.

That amount could be used to boost the bond yield from 3.7 percent to over 4 percent, a much more attractive yield than the government’s iBond offers.

If MPF investors mobilize half of their portfolios to subscribe to the airport authority’s bonds, the management fee should be waived, further reducing the overall fee.

Issuing a bond to finance the third runway will not only help the Airport Authority raise funds but also enhance the feeling of belonging to the city for Hong Kong residents. If MPF investors are allowed to include the bond in their portfolio, it will improve their investment return.

It would benefit all!

A report from the Boao Forum said Hong Kong lags behind Singapore in terms of human capital and innovation in the financial and other sectors.

Innovation in the finance industry would drive innovation in other industries, just as in Silicon Valley in the United States and in Shenzhen, Hangzhou in Zhejiang province, and Beijing’s technology hub of Zhongguancun.

Many angel funds exist to help creative start-ups and young entrepreneurs to fulfill their dreams.

However, the finance curriculum offered by local universities mainly covers theory but fails to provide opportunities for hands-on experience, as noted by the vice-chancellor of the City University of Hong Kong.

Local universities should follow the example of Yale and Harvard and build mock trading labs.

And the city should also set aside part of the MPF fund to invest in local creative industries and cultivating talent, just as Singapore’s sovereign wealth fund did.

For example, if the government earmarks 1 percent of the funds managed by the MPF for investment in college or other bonds, the amount would reach HK$5 billion.

That sum could be managed by outstanding small local fund managers.

The government should also work more closely with local universities to train more financial talent and experiment with different investment products or ideas.

This article appeared in the Hong Kong Economic Journal on March 19.

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

JZ/JP/FL

Founder and Managing Director of Pegasus Fund Managers Ltd.

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