A comprehensive study on the performance of Hong Kong Mandatory Provident Funds (MPF)

This thesis represents the first comprehensive study on the performance (raw and risk-adjusted), performance persistence, and market timing ability of the equity funds in Hong Kong Mandatory Provident Funds (MPF) scheme during the period 2001 – 2004. Regardless of the measure used (Jensen single-index alpha measure, Fama-French three-factor alpha measure, and modified Jensen alpha controlled by changes in exchange rates), US equity funds and Pacific-Basin excluding Japan equity funds, are found to consistently underperform relative to the market. The tracking errors indicate the HSI tracking funds may not exactly replicate the returns of the benchmark index and they exhibit March seasonal effect. Nonparametric two-way contingency table and parametric OLS regression analysis are employed to evaluate performance persistence. The evidence suggests that the raw returns, Jensen alpha, Fama-French alpha, and their rankings in the previous year possess predictive abilities.<br><br> When the funds are classified into high-volatility and low-volatility samples, the high-volatility funds are found to possess stronger performance persistence. Neither hot-hand nor cold-hand phenomena are found in the equity funds managed by the same investment manager. The market timing models, Treynor-Mazuy and Henriksson-Merton, provide evidence of market timing ability. The ability of MPF constituent equity funds to successfully time the market in times of changing economic condition is also investigated. The evidence is consistent with previous studies which suggest that the conditional models increase the individual fund traditional alpha measure. Regarding the fund managers’ market timing ability, the proportion of MPF funds with negative timing coefficients is higher when conditioned on public information. Finally, the market timing models with the addition of higher-order terms are found more appropriate.