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.
