Strong rebound in HK and US dollar equities in final quarter helps lift year-end results to show 5.7pc return The trillion-dollar Exchange Fund that provides backing for Hong Kong's currency peg shows an income of $56.7 billion for last year, or a return on investments of 5.7 per cent. That year-end outcome is sharply down on a record return of $89.7 billion reported in 2003, thanks to a boom year for global bonds - which comprise 77 per cent of the fund's investment portfolio - but represents a big improvement on revenues of just $9.6 billion reported for the first six months of the year. The government's share of the investment income - which may be applied to reducing its deficit - will amount to $14.5 billion, more than $2 billion up on a forecast of $12.3 billion contained in the budget for the fiscal year to March. After deducting interest and expenses ($4.8 billion), and adding a $900 million property revaluation gain, an accumulated surplus of $38.5 billion is credited to the fund's assets, which pool Hong Kong's official reserves, and a residue of equities that remained after it intervened to support the stock market during the Asian financial crisis of 1997-98. The total assets of the Exchange Fund stood at $1.06 trillion at the end of last month, of which $771.5 billion was held in debt securities, $123 billion in offshore equities (chiefly US stocks), and $82.4 billion in Hong Kong stocks. Joseph Yam Chi-kwong, the chief executive of the Hong Kong Monetary Authority, which manages the fund under a mandate from the government to preserve Hong Kong's official reserves and support its currency peg system, unveiled the results yesterday. Given the conservative guidelines under which the fund had to be managed, the result was 'quite good', Mr Yam said. The returns match a benchmark portfolio established to gauge investment performance. The investment benchmark of the Exchange Fund allocates 77 per cent of the fund to bonds and 23 per cent to equities and related investments. In terms of currencies, the allocation is 88 per cent to the US dollar bloc (including the Hong Kong dollar) and 12 per cent to other currencies. The bond-heavy portfolio dragged investment income into the red in the second quarter - down $7.2 billion on the same quarter in 2003 - as rising US interest rates saw bond prices plunging. However, a strong rebound in both Hong Kong and US dollar equities in the final quarter, along with exchange-rate gains delivered on the portfolio's euro assets, lifted the year-end outcome, Mr Yam reported. Looking ahead to this year, Mr Yam warned there was great uncertainty about how much further US interest rates would rise - and bond prices fall. The outlook for equities and currencies is equally uncertain. 'The markets have begun the year in a highly volatile way, and this volatility is likely to continue,' Mr Yam said.