What Is a Default Investment Strategy MPF?

We list factors MPF contributors and retirees should consider before investing in this product.

Kate Lin 25 August, 2023 | 9:48
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In the Mandatory Provident Fund (MPF) scheme, accumulators and retirees can choose a Default Investment Strategy fund, or DIS. This type of fund adjusts its risk levels through the fund life cycle. How exactly do they work? 

One way of understanding these products is by using the letters in the acronym as a mnemonic device, like so:

D – De-risking as the fund life cycle draws to a close – typically at retirement

I – Investors’ age

S – Statutory fee control

Let’s look at each of these in some detail.

First, De-risking Toward Retirement.

Mandatory Provident Fund Schemes Authority (MPFA) defines DIS strategies as a ‘readyF-made’ investment arrangement. They are essentially two types of mixed assets funds – the Core Accumulation Fund (CAF) and the Age 65 Plus Fund (A65F). The former typically invests 60% of its NAV in higher-risk assets like global equities, with the rest allocated to lower-risk global bonds and cash equivalents, for example. The latter has a more conservative split – about 20% of the assets of the fund are invested in higher-risk assets, and the rest in lower-risk assets.

Second, Investors’ Age

The fund allocation is pre-set, but varies among MPF contributors, depending on their ages. Contributors below the age of 50 will see new contributions and transfer-in assets invested in the Core Accumulation Fund.

When an MPF account holder reaches 50 years, the allocation mix between the Core Accumulation Fund and the Age 65 Plus Fund will become dynamic. As retirement approaches, the allocation will automatically de-risk from holding less in riskier CAF while adding to less-risky A65F over time. The overall exposure will transition to more bonds and cash.

Upon reaching the age of 65, all DIS assets are invested in the Age 65 Plus Fund, which has around 80% in bonds and the rest in equities.

Third, Fee Control

Management fees and out-of-pocket expenses are capped below 0.75% and 0.2% of the net asset value of the funds per year, respectively.

What Is Not a DIS Strategy?

DIS is a standardized strategy, but portfolio allocation isn’t equal among providers. Investors must do their homework to learn fully what the fees and charges will be with different MPF providers. Like all managed investments, high fees can erode long-term investment returns.

Other than fees, investors shouldn’t go completely hands-off with the allocation. One should review the past and monitor the current performance of the MPF funds. While past performance does not guarantee future results, it can provide insights into the provider’s track record and investment management capabilities.

Remember, DIS does not take into account an investors’ unique circumstances, such as age, financial goals, or risk tolerance. It is essential for investors to assess whether a default strategy aligns with their specific needs and retirement goals. Investors may have to express their own’s investment views and preferences with other strategies.

The idea of DIS is to diversify risk, which doesn’t imply such funds grant a guarantee or protection against asset losses throughout decades of retirement investing. The value of MPF investments can fluctuate based on market conditions. DIS’s asset allocation isn’t specifically designed to hedge against inflation risk and investors should consider this potential risk to the real future value of their retirement pot.

Lastly, investing in standardized allocation strategies doesn’t negate the importance of consulting professionals for financial advice for the most up-to-date and accurate information regarding the market environment and its suitability for your investment strategy.

Is DIS All You Need in a Retirement Pot?

While the structure of DIS gives accumulators near retirement peace of mind, the lack of personalization can be a shortcoming – what’s right for one may not work for someone else.

Christine Benz, director of personal finance at Morningstar, says: “A retiree who’s lucky enough to have a pension that supplies most of her living expenses can reasonably park a hefty share of her portfolio in stocks, holding just enough in liquid assets to cover unanticipated expenses or periodic splurges. A retiree with a shorter time horizon who is forecasting spending his portfolio during his lifetime, meanwhile, should maintain more in liquid assets and less-volatile asset classes like bonds; by venturing too far out on the risk spectrum with his total portfolio, he runs the risk of needing to pull his money out at a time when stocks or other riskier asset classes are in a trough.”

Thus, there are some factors to consider to determine the role of this one-size-fits-all solution in a broader portfolio.

Benz suggests retirees or workers who are planning for retirement in a few years use their anticipated cash flow needs to develop a customized retirement asset-allocation framework. She explains: “Money they expect to need within the next few years should go into the only asset class with a guarantee of safety over such a short time horizon: cash.”

She continues: “Assets for the middle years of retirement can go into high-quality bonds, from short to intermediate term. Finally, assets that won’t be tapped for another decade can go into stocks, which are unreliable over time horizons of fewer than 10 years but typically land in positive territory if you’re able to hang on to them for at least a decade. This approach is the one I use to frame the Bucket system for retirement portfolios.”

Benz lists out the steps to take to customize your own retirement asset-allocation framework. (Note that this exercise will be less useful if retirement is many years in the future.)

  1. Determine in-retirement portfolio-spending needs.
  2. Test the sustainability of your planned spending.
  3. Determine how much to park in cash (Bucket 1).
  4. Determine emergency fund needs.
  5. Determine how much to invest in high-quality bonds (Bucket 2).
  6. Determine how much to invest in stocks and other high-growth/high-risk assets (Bucket 3).
  7. Take personal considerations into account.
  8. Decide the sequence of withdrawals and determine positioning accordingly.

For more, here’s the detailed guide by Benz: https://www.morningstar.com/personal-finance/bucket-investors-guide-setting-retirement-asset-allocation



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About Author

Kate Lin

Kate Lin  is an Editor for Morningstar Asia, and is based in Hong Kong

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