The West Kowloon Cultural District Authority is looking for help to manage its HK$21.6 billion endowment after earning just HK$72.8 million in interest between July last year, when it was approved by the Legislative Council, and March.
The rate of return for the period covered in the authority's first annual report, released on Tuesday, was estimated at about 0.45 per cent a year, a stark contrast to the rate expected by the government when it proposed the budget for the arts hub.
The authority's financial model assumes the upfront endowment, to be used to build the city's first arts hub, will generate a 4 per cent annual return and will face an annual inflation rate of about 2 per cent. Based on those assumptions, the consultant given the job of advising the authority will be required to generate a return of at least 6.1 per cent a year.
The authority will soon choose one of six consultants to conduct a study, advise it on investment strategy and recommend investment managers. An authority spokeswoman said the study was expected to start this year.
The consultant would be required to recommend a strategy to attain a net annual return of at least 6.1 per cent on its investments, a target which one experienced financial planner described as 'aggressive' in the current volatile market. Sidney Sze Tak-chee, founding president of the Society of Registered Financial Planners, said renminbi bonds currently offered only 2 per cent.
Without any development plan or construction, the authority's balance sheet to the end of March recorded a profit of about HK$64 million after deducting the costs of staff and other operating expenses.
According to the authority's brief to consultants, the arts hub is expected to spend 76 per cent of the endowment - HK$16.5 billion - between 2009 and 2015 for the first phase of construction. The remaining HK$5.1 billion will be used after 2015 for phase two facilities, periodic major repairs, renovation and exhibition development costs.
Apart from investment strategy, the selected consultant will be asked to design a financial crisis management plan, investment guidelines and measures to monitor the performance of investment managers.
Sze said past experience showed that asking consultants to manage the endowment would result in lower returns than setting up an internal investment committee made up of reputable volunteers.