The Hong Kong Equity Portfolio

inSight

12 Dec 2002

The Hong Kong Equity Portfolio

Following the completion of the Hong Kong equity disposal programme, the remaining part of the Hong Kong equity portfolio will be transferred back to the HKMA from EFIL.

Readers may have noticed the announcement last week that the management of the Hong Kong equity portfolio, currently valued at around HK$54 billion, representing a little over 5% of the Exchange Fund, will be transferred from Exchange Fund Investment Limited (EFIL) to the Hong Kong Monetary Authority (HKMA).

With the Tap Facility of the Tracker Fund exhausted on 15 October 2002, EFIL, with a Board of Directors comprising mainly community leaders, has successfully completed the very difficult task of disposing of the Hong Kong stocks purchased in 1998. Those that are retained in the Exchange Fund as long term investments will obviously need to be managed, and a mechanism has also been established for doing so, involving the use of quite a number of external managers. There are, in fact, two groups of such external managers - the passive ones and the active ones - managing about 50% each of the equity portfolio. The former group has the mandate to manage the portfolio passively in line with, and with a view to matching the performance of, the Hang Seng Index. For them, no trading activities are involved, other than when the need arises for re-balancing the portfolio in response to changes in the constituent stocks of the Index. The active fund managers, on the other hand, will from time to time buy and sell stocks in the portfolio with a view to outperforming the Index. But they will do so on a discretionary basis, in accordance with their individual investment strategies, within certain clearly defined investment guidelines. We shall not interfere with the managers' investment decisions.

The HKMA already has an established system for monitoring the work and the performance of the many external managers providing us with similar fund management services all over the world. It will therefore be more cost effective for the HKMA to be monitoring these two additional groups of external managers for Hong Kong equities as well. Furthermore, the role of monitoring external managers is a much reduced one, compared with the management of the very sensitive equity disposal programme, and therefore would not justify the high level input from and the continuous attention of the Board of EFIL.

The question of possible conflicts of roles for the HKMA as regulator and as the caretaker of the Exchange Fund's shareholding in a number of listed companies has been addressed carefully. With EFIL, the HKMA in the past few years exercised the voting rights of the shares on the recommendations of EFIL and, in certain cases, the external managers. This arrangement worked well, particularly with the set of proxy voting guidelines promulgated transparently by EFIL to provide comfort to the market. These guidelines were devised to protect the interests of the Exchange Fund as a minority shareholder while keeping potential influence (from the HKMA as a Government agency or as banking regulator) on normal commercial decisions of companies to the minimum. Going forward, in order to tap into the external managers' greater knowledge of the companies and to eliminate any perception of Government using its shareholder status to interfere in the affairs of these companies, arrangements will be made to have the voting decisions delegated to the external managers. The external managers will be required to vote in accordance with their own proxy voting guidelines previously provided to the HKMA. The managers will be expected to act in the best interests of the Exchange Fund as a shareholder, specifically to protect and enhance shareholder value.

The logistics of transferring the management (of the external managers) of the Hong Kong equity portfolio from EFIL to the HKMA should not be unduly burdensome. There are the legal issues concerning the transfer of management contracts with the external managers, and there are the operational issues concerning the physical relocation of staff, computers and records, the changing of signing authorities, and so on. The process should not take long. It should be completed by the end of January next year, at which time EFIL, a historical creation with a historical mission, will cease operations.

Once again, a big "thank you" to the Chairman and Directors of EFIL.

 

Joseph Yam

12 December 2002

 

Related Press Release:

The HKMA to take over from EFIL the management of the Exchange Fund's Hong Kong equity portfolio, 3 December 2002

 

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Last revision date : 12 December 2002