HONG KONG MONETARY AUTHORITY Annual Report 1996
PERFORMANCE IN 1996
At $535 bn, or $83,316 per person in the territory, the Exchange Fund represents a very significant store of value for the people of Hong Kong. The HKMA actively explores and adopts a prudent investment strategy to ensure that the investment management process of the Fund keeps pace with international best practices.
OBJECTIVES
The objective of the Exchange Fund is to safeguard the exchange value of the currency of Hong Kong. The investment strategy of the Exchange Fund has three key objectives:
- to maintain maximum liquidity to defend the Hong Kong dollar exchange rate;
- to preserve capital; and
- to generate additional returns subject to the above.
ACHIEVEMENTS
PRESERVE CAPITAL AND GENERATE RETURNS
From 1 January 1993 to 31 December 1996, total assets of the Exchange Fund increased by 85.9% or at a compounded annual growth rate of 16.8% from $287.5 bn to $ 534.5 bn. Over the same period, the net assets, i.e. the accumulated surplus of the Exchange Fund increased by 61.8% from $106.6 bn to $172.9 bn.
This represents a compounded average annual growth rate of 12.8%. This is higher than the average nominal GDP growth rate of 12.1% for the period 1993 to 1996. These comparisons, by themselves, are incomplete.
INVESTMENT OBJECTIVES AND BENCHMARKS
In order to preserve the capital and to meet foreign exchange requirements for market intervention purposes, the Exchange Fund maintains very high liquidity and restricts its investments to a mix of liquid securities of the highest credit quality. The Exchange Fund therefore pays an opportunity cost (in terms of its rate of return) for its stringent adherence to prudent liquidity and credit standards.
The investment performance of any fund should be judged within the context of its investment objectives and its investment benchmark. The investment objectives define the investment strategy which involves a trade off between risk, liquidity and the expected rate of return.
A higher rate of return requires the assumption of higher risks while the demand for higher liquidity or greater protection of capital would imply a lower rate of return. The rate of return, therefore, is by itself an inadequate measure of the performance of an investment manager.
An objective measure of performance is to compare the rate of return achieved against that of a benchmark investment portfolio which reflects the levels of risks and liquidity acceptable to a fund.