HONG KONG MONETARY AUTHORITY Annual Report 1996

PERFORMANCE IN 1996

An investment manager may deviate from the benchmark in order to achieve a rate of return higher than that of the benchmark investment portfolio.The manager's performance would be considered superior if the returns generated on his or her portfolio are higher than the rate of return set by the benchmark.

Given its conservative investment objectives, the Exchange Fund's benchmark is a diversified portfolio of a mix of liquid, high quality multi-currency fixed income instruments, with specific allocations in major currencies (Chart 1) and a small exposure to major equity markets.

RATES OF RETURN WELL ABOVE INVESTMENT BENCHMARKS

A generally accepted measure of the rate of return of a fund without liabilities is the rate of return on the average amount of assets under management. However, the measurement of the rate of return is less straight forward for a fund with liabilities, particularly interest-bearing liabilities.

The Exchange Fund has substantial interest-bearing liabilities, mainly the fiscal reserves placed with it by the Government and the Exchange Fund Bills and Notes issued. At 31 December 1996, these are equivalent to 27.3% and 15.6% of total assets respectively. The need to pay interest on liabilities make the rate of return on average assets inappropriate as a measure.

A more appropriate measure would be the rate of return on the average amount of assets under management net of all liabilities (rate of return on average net assets). Since interest may not be paid on all liabilities, yet another measure would be the rate of return on the average amount of assets under management net of interest-bearing liabilities.

For the four years from 1993 to 1996, the total return on average net assets of the Exchange Fund was 55.8%, which is 24.9 percentage points more than the total return of the benchmark investment portfolio. Over the same period, total return on average assets, net of interest-bearing liabilities was 34%, which is 3.1% better than the benchmark (Table 1).

Table 1:
COMPARISONS OF RATE OF RETURN AGAINST BENCHMARK

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