Because of its size and statutory purposes, Hong Kong's Exchange Fund is managed in a way that sets it apart from ordinary investment funds.
A number of our people's representatives have advised me that, apart from the exchange value of the currency Hong Kong and the safety of the banking system, the people of Hong Kong have a keen interest in how their money - over one trillion in the Exchange Fund - is managed. Having the responsibility for the day-to-day management of the Exchange Fund, we should try and explain this clearly in simple terms. This we have done in our various publications and in our summer exhibition last year. But we should obviously promote a wider interest and a better understanding of our investment strategy.
Unlike ordinary investment funds with which members of the public may be more familiar, the Exchange Fund is a very large fund. It is so large that the movement of a fraction of it from one market to another, or from one financial instrument to another, may have a significant destabilising impact on the relevant markets. I have often drawn an analogy with the difficulty that an ocean liner has in negotiating a tight turn quickly when sailing through a narrow channel. A responsible monetary authority does not make waves in international finance. That is why, in the design of our investment strategy, we take a long-term view. And in our day-to-day management, we refrain from short-term market plays. Furthermore, whenever we contemplate carrying out significant transactions (relative to the liquidity of the relevant markets), we usually inform the central banks concerned as a point of courtesy.
The Exchange Fund also has statutory purposes, the primary one being to affect directly or indirectly the exchange value of the currency of Hong Kong. This, and the need to repay the fiscal reserves money deposited with the Fund on demand, means that there is a need to maintain a degree of liquidity that is much higher than that of the ordinary investment funds. Since the Fund represents public money, there is also a tendency for it to be more risk averse. The requirements of high liquidity and low risks mean that we should be prepared to accept a rate of return for the Exchange Fund that would be lower than that of other more aggressive, risk-taking funds with little or no liquidity requirement. Those who monitor our investment performance should be aware of this.
These considerations have always dictated the investment strategy of the Exchange Fund and our behaviour in its management. In 1998, however, three events led us to conduct, at the end of the year, a major revision of the investment strategy of the Exchange Fund. First, the decision was taken to allow the fiscal reserves, from April 1998, to earn a return that is the same as that for the Exchange Fund as a whole. Secondly, we purchased a large amount of Hong Kong stocks in August 1998. Thirdly, the assets of the Land Fund were merged into the Exchange Fund in November 1998. Having regard to the various factors just mentioned, and making use of rather sophisticated asset allocation methodology, we designed a new investment benchmark for the Exchange Fund, and this has been in use since the beginning of 1999. The investment benchmark, in simple terms, is as follows:
Corresponding to this investment benchmark is a benchmark return reflecting the investment return if one were not to deviate from all those percentages. In practice, however, we do deviate, within pre-determined limits, from those benchmark percentages, on the basis of our insights into different market trends, in order to achieve a return that beats the benchmark return. This is where investment skills come in. It is also how performance should normally and objectively be measured, that is, in terms of the margin over (or below) the benchmark return that we manage to achieve. For the two years since the establishment of the new investment benchmark, our investment performance has been above the benchmark return: 10.8% in 1999 (benchmark: 5.5%) and 4.8% in 2000 (benchmark: 3.8%).
Joseph Yam
14 June 2001
Related Viewpoint Articles:
More information on the Management of the Exchange Fund can be found here.
More information on the Performance of the Exchange Fund in the year 2000 can be found here.
More information on the latest Exchange Fund Balance Sheet Data can be found here.
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