A useful by-product of the HKMA's policies on external management of the Exchange Fund is the development of Hong Kong as a fund management centre.
The Exchange Fund uses external managers to help generate an investment return that is consistent with its risk profile by:
- tapping the best of the investment expertise available in the market place;
- capturing a mix of investment styles within the investment universe so as to provide diversity; and
- transferring market knowledge and information from external managers to in-house managers.
A co-incidental outcome is the growth of Hong Kong as a fund management centre because the majority of external managers and related service providers, such as custodians used by the Exchange Fund, either set up or expand their presence in Hong Kong after their appointments by the Exchange Fund. A local presence greatly enhances the dissemination of market information and the quality of administrative support to the Exchange Fund.
The Exchange Fund is able to influence the business direction taken by our external managers in Hong Kong because the appointment criteria assign a heavy weight to both the integrity of the institution and its investment performance as well as its commitment to Hong Kong.
To ensure quality, the appointment process is very lengthy. An external manager is put through at least three screening processes prior to its appointment.
The first screening identifies a list of candidates from the top performers in each type of mandate to whom requests for proposals (RFPs) are sent. The first screening scores each potential candidate on its short, medium and long-term investment track record and the extent of its presence in Hong Kong. Different scores are assigned depending on whether the Hong Kong office is a marketing office or an investment office and whether its presence has increased or decreased in recent years. If the candidate does not already have a presence in Hong Kong, the intention to establish a presence also receives a score.
Candidates with the higher scores from the first screening are sent an RFP. The RFP is an extensive questionnaire on the history and expertise of the institution, its investment philosophy and style, the stability of its investment professionals, its compliance record and the quality of its risk management, administration and infrastructure. The responses are then scored according to these attributes to identify final candidates for on-site visits.
Staff of the HKMA's Reserves Management Department visit the head offices and the relevant investment offices of the short-listed candidates to verify the substance of the responses against the RFPs. Candidates who score well on the on-site visits are appointed when both parties agree to the investment guidelines, the fee structure and the terms and conditions of appointment.
Appointments by the Exchange Fund have been a major factor in attracting top global fund managers to Hong Kong. The Exchange Fund employs 37 fund manager groups to manage 63 portfolios (end-August 2002 figures). As many manager groups excel in more than one investment product, 14 fund manager groups are engaged by us to manage more than one portfolio. Of the 37 manager groups employed by us, 29 are among the top 100 globally in terms of assets under management (AUM) and 33 have offices in Hong Kong.
Assets of the Exchange Fund are custodised with five custodians. Three of the five are among the top five global custodians1 and have their regional offices in Hong Kong. Subsequent to its appointment as the custodian for the Tracker Fund of Hong Kong, State Street moved its regional processing centre from Sydney to Hong Kong in the second half of 2000, making Hong Kong its operations hub for Asia excluding Japan. These three custodians together employ close to 400 custodian staff in Hong Kong. Hong Kong has become the leading global custodian centre of Asia.
Joseph Yam
7 November 2002
1 Source: 2001 Survey on Global Custodians conducted by Global Custodian Magazine, which rank custodians by assets under custody.
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