Hong Kong MPF Risk Classification and Indices

Hong Kong MPF Risk Classification and Indices

The Hong Kong MPF Risk Classification and Indices aim to classify Hong Kong Mandatory Provident Funds (HK MPFs) into different risk categories in order to provide additional information on the relative risks of HK MPFs to assist MPF policy holders and financial institutions in selecting HK MPFs and scheme providers respectively. They are also designed to provide an alternative mean in monitoring the performance of HK MPFs and to create the peer group of HK MPFs, which is based on their relative risk classification, for fund performance comparisons.

To qualify for the Hong Kong MPF Risk Classification and Indices, all HK MPFs must have at least 3 consecutive years of performance history. Their average 3-year annual standard deviations are ranked to segregate the HK MPFs into five different risk quintiles (indices or ratings), namely low risk quintile, low to medium risk quintile, medium risk quintile, medium to high risk quintile and high risk quintile. All qualified MPFs have the same weighting within the risk indices.

Each index value is computed every month by taking the simple arithmetic average of all relevant HK MPFs returns for the month, which is then multiplied with the index value of the preceding month. The HK MPF risk indices are reviewed and rebalanced semi-annually.

Q and A

1. What is the interpretation of standard deviation and how can it be used as a risk measure?

Standard deviation measures the variability of returns from their average and expected values as well as the dispersion of these variations over time. A higher value on standard deviation indicates a wider dispersion of these variations from their average value. Also, it reflects a lower certainty and a higher risk on the predictability of the eventual outcome or return.

2. Why is it more appropriate to classify funds into different risk categories by their volatility rather than the weightings of different asset types within their fund portfolios?

Some investors may categorise funds into different risk categories or ratings purely by relying on the weightings of different asset classes within the fund portfolios. Such a classification is based on the assumption that equities have higher volatility than fixed income securities. As such, the larger the funds portfolio exposure on equities, the higher the volatility of the fund should be. However, higher portfolio allocation to equities does not always necessarily have higher volatility than those with smaller portfolio allocation to equities. Hence, it is more appropriate to use the volatility of funds as an objective parameter rather than the weightings of different asset classes within their fund portfolios to classify funds into different risk ratings.

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