Birthday blues back to haunt Tracker Fund

Business | Ivan Tong 15 Nov 2019

Tuesday was a red-letter day for Tracker Fund of Hong Kong (2800) as it was on November 12, two decades ago, that the passively managed exchange-traded fund made its debut.

The fund was born in times of turmoil, so to speak. The Asian Financial Crisis erupted in July 1997 in Thailand before spreading to neighboring nations, and both the Hong Kong dollar as well as the local stock market came under heavy speculative attack by international predators that year and the next.

The SAR government purchased Hong Kong stocks on a large scale to fend off the speculators, and Tracker Fund was an outcome of this defensive intervention. The rest is history.

On Tuesday, State Street Global Advisors, the manager of Tracker Fund, struck the gong at Hong Kong's stock exchange and the ETF saw its turnover rise to second place at HK$3.6 billion that day, only surpassed by Tencent (0700), which is known as the anchor of the benchmark Hang Seng Index.

It is a pity that the reception, meant to take place at night, had to be canceled due to the unrelenting violence on Hong Kong's streets, but humans are fortune's fools.

Tracker Fund was born during a financial crisis, and twenty years on it seems the wheel of fortune has come full circle, with the city on a storm-tossed boat once more.

Alas, among the three important officials who fought the predators, only Norman Chan Tak-lam stepped down safe and sound.

Of course, the Tracker Fund's manager paid glowing tributes to the ETF as it celebrated its birthday.

For instance, the city's first exchange traded fund has delivered a total return of 270 percent since its launch, if dividends are included in the calculation, with annualized returns of around 6.8 percent, outperforming some traditional blue-chip stocks including HSBC (0005) and Sun Hung Kai Properties (0016).

It is said that a growing number of wage earners have included the ETF in their investment for retirement through Mandatory Provident Fund schemes in recent years.

The Tracker Fund was offered to the public at a price of HK$12.88 back in 1999, and yesterday its shares closed at HK$26.55, a rise of about 106 percent, net of dividends, indicating a slightly more than double gain on paper.

Tracker Fund's glory days were mostly in the first decade after its launch, when the government returned its wealth to the people by setting favorable prices.

Moreover, during the period between its IPO and 2009, the fund, which was replicating the performance of Hang Seng Index constituent stocks at that time, benefited from the large correlation between the HSI and the economic take-off in the mainland. However, over the past decade, the HSI has been increasingly lagging behind the Hang Seng China Enterprises Index, which has brought great challenges to its ability to properly reflect the local economy.

I looked up the performance of constituent funds under the Invesco MPF. The best performer was the Hong Kong and China Equity Fund, founded in 2003, with a cumulative performance of 349.69 percent as of October 31 this year.

The Invesco Hang Seng Index Tracking Fund, which invests directly in the Tracker Fund, was founded in 2014, and has a cumulative performance of only 23.59 percent since its inception.

It's difficult to make an "apples-to-apples" comparison between the two funds as they were launched at different times, but it is also straightforward and easy to see that the performance of funds which are connected to the Tracker Fund are relatively unattractive compared to other funds in recent years.

Hence, even if State Street says the Tracker Fund has attracted more funds from MPF employees, in recent years, every wage earner has been getting a slice of the cake from a growing number of choices of MPF funds.

There may be more money flowing to the Tracker Fund in absolute terms but it is only a small piece of the pie.

The valuation of Hong Kong stocks is cheap, but it is hard to be optimistic for prospects next year.

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