Today is the 10th anniversary of the listing of the Tracker Fund of Hong Kong (TraHK). I thought readers would be interested in knowing something about the background of the listing of TraHK.
We are now facing a global financial crisis, with governments around the world introducing a whole raft of intervention measures, some of which are on an unprecedented scale. Now the focus is on how to "exit" from these measures and, looking back after ten years, I think all those involved in designing and implementing TraHK can take some pride in having been part of this innovative and successful exit strategy carried out by the Hong Kong SAR Government. The mission, of course, was to dispose of the stocks acquired by the Government in the stock market operations of the summer of 1998 with minimal disruption to the market. This was by no means a small task - but together with the project team we rose to the challenge with an exit strategy that saw the launch of the first Exchange-Traded Fund (ETF) in Asia outside of Japan, in an IPO which turned out to be the largest in the region (again excluding Japan) at the time of launch, raising $33.3 billion from over 180,000 retail investors and institutions.
We created the Tracker Fund in a little under 6 months, from the time the Board of Exchange Fund Investment Limited (EFIL) recommended on 21 June 1999 that this was the way to launch the disposal programme. We did this at a time when market sentiment in Asia was just beginning to become less negative. If this were not enough of a challenge, we also had the shadow of Y2K hanging over us! Due to the sheer hard work, long hours and perseverance of those involved, we overcame countless operational, IT, legal and regulatory challenges thrown at us.
Just to add to the degree of difficulty, we had to work in the full glare of the public eye, knowing that any mistakes in implementing the project or miscommunication, however slight, could have a severely negative effect not only on our stock market but also on the international perception of Hong Kong.
The decision to use an ETF as the disposal strategy was not an easy one. The strategy was then unorthodox and unproven in Asia, as was the investment appetite for such a product. The investment banking community was perplexed that we should launch an ETF when a block trade or a convertible bond option was much more "familiar" or "safer". Our legal advisers were perplexed that we should launch a fund through an IPO. Our global co-ordinators were amazed by our determination to create an innovative "Tap Facility" to allow the continued block creation of more Tracker units from the remaining portfolio of shares. We also insisted on not giving any discount to the public at the launch of the IPO and instead offered an innovative back-end loaded incentive scheme in the form of one-year and two-year loyalty bonuses.
From the Government perspective, we had by April 2001 recouped more than the $118 billion used by the Exchange Fund in the stock market operation. In total, we sold $140 billion worth of shares into Tracker, received $24 billion from dividends on our shareholdings and still retained $50 billion in the Exchange Fund's long term equity portfolio when the "tap" into Tracker was terminated.
We could not have achieved this without the dedication and support of a team of highly professional advisers: TraHK's manager and custodian; the three global coordinators; the lawyers; the marketing & PR firms; colleagues at the Securities and Futures Commission, Hong Kong Exchange and Clearing Limited and Central Clearing and Settlement System; and of course the Chairman, Mr TL Yang, and all the directors and fellow staff of EFIL.
If one were to mark TraHK as an exit strategy, many would agree that it deserves a fine report card. We did dispose of the shares with minimal disruption to the market. The Fund did encourage longer-term investment in unit trusts and kick-started the ETF market on the Hong Kong Exchange and elsewhere in Asia, where we now have a variety of ETFs covering a wide range of asset classes. The result has been the provision of more choice to investors, both retail and institutional, at lower cost than traditional unit trusts.
Ten years on, it will be interesting to see how the exit strategies currently on drawing boards around the world unfold and how successful they will be.
This is the first of a series of articles, under the title "inSight" (匯思), written by me or staff members of the HKMA. I am committed to enhancing the HKMA's communication with the public, and we will use this as well as other channels to keep the community informed of our work and the developments in the financial markets.
Norman T. L. Chan
Hong Kong Monetary Authority
12 November 2009