Exchange Fund set to widen portfolio
The Exchange Fund is eyeing more asset classes, including property, private equity and yuan-denominated instruments, as public pressure mounts for it to increase returns while diversifying risk.
The fund, which has the mandate of supporting the stability of the Hong Kong dollar under the oversight of the Hong Kong Monetary Authority (HKMA), invested HK$83.6 billion in new asset classes as of the end of last year, with just over a third invested in private equity, another third in emerging market bonds and equity, a quarter in yuan assets, and the rest in property.
The HKMA's chief executive, Norman Chan Tak-lam, said in an article posted on the Hong Kong Monetary Authority website yesterday: 'Compared with the traditional assets which are safe and liquid, certain new asset classes can help deliver [a] higher return in the medium and long term despite their lower liquidity and higher risk.'
The move to invest more in new assets comes after a dismal last year, when global market turmoil meant the fund posted its third-worst performance. Central banks across the globe have been looking for alternative ways to enhance their yields.
Raymond Yeung, an economist with ANZ based in Hong Kong, said: 'The fund needs to put up an impressive score sheet to curb political pressure.' As the yuan became more global, the public would increasingly question the need to maintain a huge fund for the currency board, he said.
The Exchange Fund made HK$27 billion last year, with a rate of return of 1.1 per cent, well behind the city's 5 per cent inflation over the same period, and far below the average 5.6 per cent earned over the 18 years since the HKMA's inception.
The fund began investing in emerging market bonds in mid-2008, and then moved on to investment in private equity in early 2009. It then expanded into other new asset classes, including emerging market equities, property and yuan assets.
In order to ensure the stability of the fund, the financial secretary and the Exchange Fund Advisory Committee have decided that the size of diversified investment will not exceed one third of the accumulated surplus of the Exchange Fund.
However, Chan said that it was probably premature to draw any conclusions from the investment performance last year.
Since it started investing in private equity and property, the fund's combined internal rate of return was around 9 per cent a year as of last December.
Its emerging market bonds and equities, together with yuan assets, also produced attractive results, with an annualised rate of return of 7 per cent.
For private equity investments, the Exchange Fund mainly invests in sectors with favourable prospects such as energy, technology, media and telecommunications, and health care. By the end of last year, about 30 private equity investments had been made through various means, such as subscriptions in funds and through co-investment.
The Exchange Fund's rate of return on its investments last year, well behind Hong Kong's 5 per cent inflation over the same period