The Mandatory Provident Fund Schemes Authority (MPFA) has recently updated its Guideline III.2 on Equities and Other Securities (Guideline) to include active exchange-traded funds (ETFs) as permissible investment for MPF funds. These active ETFs must be Securities and Futures Commission-authorised funds listed on the Hong Kong Stock Exchange and compliant with existing MPF permissible asset requirements.
To ensure an appropriate degree of risk control, active ETFs will initially be subject to an aggregate 10% exposure limit (10% Cap) shared with other permissible investments such as Hong Kong-listed private equity funds (further details available here), unlisted mutual funds and real estate investment trusts (REITs) (as further discussed below).
Active ETFs classified as “derivative funds” have also been excluded, and investment in active ETFs may not be used to circumvent existing MPF regulations. This means exposure to products employing any complex investment strategy such as cryptocurrencies continue to be restricted for the time being.
Active ETFs can typically be used as building blocks of a portfolio to achieve asset diversification. The above expansion reflects the MPFA’s continuous efforts to broaden the MPF investment universe and refine its regulation, with a view to improving risk diversification and offering investment options with better returns to the Hong Kong working population.
Other forthcoming changes include permitting investments in REITs listed on the Shenzhen Stock Exchange and the Shanghai Stock Exchange, as well as lifting the investment limits for REITs that are listed on five approved exchanges, following the MPFA’s completion of its review of the list of permissible investments. Currently, subject to the MPFA’s approval, up to 100% of the funds of an MPF product may be invested in REITs that are authorised by the SFC and REITs listed on an approved stock exchange in Australia, UK and USA, provided that investment in each of the aforementioned REITs does not exceed 10% of its funds. On the other hand, REITs that are listed in Canada, France, Japan, Singapore or the Netherlands, are subject to the 10% Cap (further details available here).
The MPFA will also assess feasibility for broader gold ETF inclusion, aligning with Hong Kong’s goal to become a regional gold trading hub. At the moment, there are two MPFA-approved gold ETFs in which MPF funds may invest, subject to the 10% Cap.
Expansion of MPF investments into active ETFs will provide an incentive to asset managers which intend to offer such products in the Hong Kong market. We believe the developments outlined above mark a significant expansion in the scope of MPF investment universe and present a strategic opportunity for issuers to tap into Hong Kong’s MPF asset pool through offering funds that can meet the growing demand for more yield-generating, stable-return products in the retirement savings ecosystem.
For further information, please contact:
Ming Chiu Li, Partner, Deacons
mingchiu.li@deacons.com
