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Hong Kong Budget 2015-2016
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Unconventional, or alternative, assets generally refers to private equity, property, commodities and even works of art. They usually increase in value over a longer timeframe than conventional assets like bonds and stocks. Photo: Reuters

Hong Kong fund managers urged government to invest new future fund in unconventional assets

Experts say part of new government reserve could be invested in assets like property or art

The government should consider investing in unconventional and less-liquid assets as part of its strategy so its new future fund can enjoy better returns, fund managers have recommended.

The fund, made up of the HK$220 billion land fund and a third of future government surpluses, is being set up to hedge against budget deficits. Government-appointed experts have warned that a structural deficit could emerge in a decade as the city's workforce shrinks.

The fund managers' proposals came after Financial Secretary John Tsang Chun-wah announced in his budget last week that the future fund would be set up this year. The investment approach will be determined by the Financial Services and the Treasury Bureau as well as the Hong Kong Monetary Authority.

Unconventional, or alternative, assets generally refers to private equity, property, commodities and even works of art. They usually increase in value over a longer timeframe than conventional assets like bonds and stocks. They involve higher risk, but can yield higher returns.

John Tsang announced the new fund in his budget last week.
"Taking a longer-term and more strategic approach with a portion of the reserves is a sensible approach," said Mark Konyn, CEO of Cathay Conning Asset Management. "The benefit of taking a longer-term approach is that immediate liquidity is not the main focus and therefore institutions can be rewarded for giving up short-term liquidity."

Hong Kong Investment Funds Association chairman Bruno Lee Kam-wing also said long-term investment should not be confined to conventional assets, adding: "A rise in interest rates could also have a negative impact on bond investments."

Tsang's long-term fiscal advisers projected earlier that the fund could reach HK$510 billion in 10 years, equivalent to about 60 per cent of the present fiscal reserves of HK$819.6 billion, assuming an annual investment return of 5 per cent.

But the Monetary Authority said part of its Exchange Fund had been enjoying much higher return rates - ranging from 10 per cent to 15.9 per cent in the past three years - by investing in a long-term growth portfolio covering private equity and real estate projects.

The authority said the portfolio was set up in 2008 to diversify the fund's investments.

"Investment in real estate is mainly through subscription to real estate funds and international real estate investment managers with a focus on prime-quality properties in major overseas, gateway cities," it said.

At the end of last year, the portfolio was worth HK$115.2 billion - accounting for 3.6 per cent of Exchange Fund assets - with an annualised return rate of 13.5 per cent. The authority capped total investments in this portfolio at one-third of the fund's accumulated surplus, valued at HK$636 billion in December.

Lee said inviting professionals to manage part of the future fund could be beneficial as they specialised in different assets. "Having said that, the authority would need to lay down clear objectives and monitor their performance closely," he added.

Fund manager Marko Ho Wai-lap, a member of think tank SynergyNet, disputed the need for a future fund. "Instead … the government should adopt a more aggressive investment approach for the massive fiscal reserves and find a way to stabilise revenues," he said.

This article appeared in the South China Morning Post print edition as: 'Think differently on future fund'
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