Investors see wrong risk in retirement planning

Investment chiefs warn the biggest risk Hong Kong''s pension members are facing is inflation.

For a financial capital that was introduced to managed investments more than three decades ago, the popularity of managed investment in Hong Kong is low compared to other financial centres in the region. Take fund investment using monthly saving plans as an example. There are 10,000 investors in Hong Kong putting away a fixed amount of money each month to buy unit trusts under an investment plan, according to figures provided by JF Asset Management, a Hong Kong-based manager. The figure is 640,000 in Taiwan, despite the fact its population of 20 million-odd is only three times to that of Hong Kong's.

A recent survey from the Hong Kong Investment Funds Association (HKIFA) showing 7.8% of the adult population invest in funds, albeit a two-fold increase from a few years ago, suggests the fact that a large percentage of the public is still unfamiliar with funds investment. With the introduction of a mandatory provident fund scheme coming into force on 1 December, many fund investment professionals fear most workers may be ill-equipped to make informed investment decisions in a fund choice environment.

Blair Pickerell, managing director of JF Asset Management, explains the fund penetration rate is low partly because many Hong Kongers, contrary to the sophisticated image their fellow citizens at the higher end of the investment market project to the outside world, are conservative and see funds as unduly risky.

According to Pickerell, many workers do not realize the biggest risk facing them in retirement planning is likely to be inflation risk.

"The cost of living in Hong Kong has increased by 66% over the last decade while deposit in the whole banking system has returned 45%," he says. "And this is the point that the general American public has come to understand. They view the loss of purchasing power as the biggest risk there is."

He adds that the US fund industry has grown seven-fold in the last 10 years and 72 times in the past 20, with the fund penetration rate now reaching 49% and money invested in mutual funds exceeding the total deposit in banks.

"If they put HK$100,000 ($12,825) on deposit in the bank 10 years ago, in real terms it would have dropped 13% in value. Over a 24 year period, that HK$100,000 is effectively worth HK$59,000 in real terms. That's what happened when they put their savings in banks, thinking that they are secure."

Lindsay Mann, until recently chief executive office of AXA Investments in Hong Kong and vice-chairman of HKIFA, shares the same concern. In his final address to investment managers as the association's vice-chairman this month, Mann said the industry will be increasingly involved in helping members make informed investment decisions.

"In particular, investment managers are vested with the difficult task of explaining to employees, especially those who are young or unsophisticated, the inadequacies of capital preservation products or guaranteed funds," Mann warns.

"It is inevitable that these funds will attract some following, especially in the first few years, because they provide a semblance of security," he says.

Mann says it is the industry's responsibility to highlight the shortcomings of capital guaranteed funds, particularly their inherent inflation risk, which he believes is probably the most important risk that employees have to manage in retirement investment.

Pickerell says JF will launch a series of campaigns in the coming months aimed at raising public awareness about the need for financial planning. The campaigns include the upgrading of investor communication systems, retraining its financial advisers on holistic financial planning and press advertising.

"And we may just sell a few more unit trusts along the way," he adds.