When Rex Auyeung opened Principal International's office in Hong Kong six years ago to fight for a share of the newly-established Mandatory Provident Fund (MPF) market, he faced a seemingly hopeless task. As the new kid on the block, he had to compete with many of the international insurance and fund management companies that were already well-established in Hong Kong. And they all had to face up to dominant local players, particularly the HSBC group.

Although Principal is one of Fortune 500 companies with more than US$128 billion in assets under management, it was not a well-known name in Hong Kong. To win business in the MPF market, the company had to find a niche for itself. "We could not have bought into the market because it was completely new," he says.

"What we did was to focus our Hong Kong operation on one area, the management of MPF funds," Auyeung says. Of the 20 or so MPF managers in Hong Kong, Principal is the only one specializing in one single business, pension fund management. "We take the boutique or specialist approach," he says.

To do that, the company has invested heavily in account processing technology so that "we can provide the highest standard services to our clients," Auyeung says. Because of the nature of the MPF, including transferability of accounts, record keeping and regular reporting can be extremely complicated, according to Auyeung.

There is no margin for error. "Nothing can alienate a customer more than receiving a statement that misstates the amount of the money he or she has been saving for retirement," Auyeung says. "We have developed our own sizeable information-technology platform to handle all the transactions," he says.

Good service, Auyeung says, also involves having properly trained staff to explain clearly the advantages and risks of the products offered by the company to potential customers. He says that his company emphasizes long-term stable returns on investment. "That's the guiding principle of our management strategy," he says.

The company does not aim to attract customers with occasional outstanding performances, Auyeung says. "We always keep in mind that we are not just a fund manager, but an MPF fund manager who must understand the importance of maintaining a long-term steady performance," he says. "Our clients want to be assured that the return on investment does not fluctuate too much to avoid hitting the low point when withdrawing from the fund on their retirement," Auyeung says.

An advertising blitz in the past several years has helped establish the company's brand name in Hong Kong. Auyeung himself made an appearance in several of his company's television ads. Earlier this year, the company won the "Superbrands Tribute Award 2002/03" and was ranked one of the best performing investment managers over the past five years by Watson Wyatt, an actuary firm.

Principal's Hong Kong operations involve mainly marketing and administration. The management of funds is done largely out of its New York office. The investment of the Hong Kong MPF funds is, of course, in full compliance with government regulations, Auyeung says.

A major rule requires at least 30 per cent of the MPF funds under management to be invested in Hong Kong-dollar-denominated assets, including equities, fixed-interest securities and other commercial paper issued in Hong Kong.

Auyeung says that he and some other practitioners in the profession are lobbying the government to relax the rule because of the long-term debt securities market in Hong Kong is relatively under-developed. "The local long-term capital market lacks the width and depth to accommodate the investment needs of the enlarging pension fund pool," he says.

The government and the financial sector have long ago recognized the need to develop the debt securities market to meet the projected needs of long-term capital by many mainland enterprises. But economists have noted that development of such a market has been hampered by the lack of government bonds and other securities that can serve as a benchmark for private-sector issuers and traders.

As such, regular issuers of fixed-interest debt instruments include only the large government-owned companies, such as Mass Transit Railway Corp and Kowloon Canton Railway, and a few publicly-traded companies, especially the property groups. The majority of these instruments are tightly held by institutional investors, including banks, pension funds and major corporations. For that reason, secondary trading has always been too thin to enable large-scale unloading by investors to meet unexpected cash calls.

Auyeung says that relaxing the 30 per cent rule would allow pension fund managers greater "flexibility" in diversifying part of the investments into the US or other long-term capital markets.

But he also agrees that the MPF scheme can provide the liquidity to help develop the Hong Kong capital market.

"MPF is good for Hong Kong in more than one way," he says. Part of the pool of stable funds that has been invested in equities can help stabilize the local stock market, he says. At present, about 60 per cent of the total MPF pool is invested in fixed-income instruments and the rest is in equities. As the pool gets bigger, more long-term stable funds will flow into the local bourse, he predicts.

MPF has gone through a rough time in the past several years when the Hong Kong economy was in the doldrums, Auyeung says. But people should not feel worried because they should always take a long-term view on MPF, he adds. What's more, the investment environment has definitely improved in recent months as signs of an economic revival are becoming increasingly clear, he says.

Such optimism has already been reflected in the stock market rally that took the share price indicator to the highest point in over two years.

Economists predict that the recovery can be sustained by strong export performance and the tourism boom fuelled by the continuous influx of mainland tourists.

As the unemployment rate has begun to stabilize, economists expect consumer spending will begin to pick up in 2004. This would help reverse the deflationary trend sometime in 2005, economists say.

"I expect the return on investment will improve in coming years," Auyeung says. And as the economy improves, the growth of the MPF pool will accelerate, he predicts.

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