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Yam Pleased With Exchange Fund Investment Performance

by Mary Swire, Tax-News.com, Hong Kong

13 November 2006


Hong Kong Monetary Authority Chief Executive, Joseph Yam announced on Thursday that he is optimistic about the Exchange Fund's investment performance this year, but that it may be affected by a number of factors.

The Exchange Fund's investment income amounted to HK$67.8 billion by September, HK$30 billion more than in all of 2005. The Government's share of investment income was HK$19 billion, higher than the original forecast of HK$18.2 billion.

In his latest Viewpoint article, Mr Yam stated that the true and fair measurement of investment performance is the differential between the rate of investment return and the rate of return of the benchmark portfolio, or the "alpha".

He explained:

"We deviate from the benchmark portfolio in asset allocation, hoping to achieve better results than sticking to the benchmark allocation, meaning essentially doing nothing. If we are successful, the alpha will be positive. If not, it will be negative."

"Since benchmarking was introduced, the alpha has been positive in every year except 2004 when it was zero, meaning that our investment performance has been good. With two months to go, we are optimistic about achieving a positive alpha this year, but the world is an uncertain place and we cannot give any guarantee."

He went on to add that a number of factors can affect the Exchange Fund's investment performance. Sharp, adverse adjustments in global financial markets are always a possibility, particularly when issues of global significance continue to affect financial stability.

The US trade imbalance remains, as does the common view that it cannot be sustained indefinitely. Geopolitical tension has been building in some places, notably in this region, he observed.

Mr Yam went on to state that macro adjustment and control on the Mainland is still going on, and the effects of administrative measures for macro-economic control are difficult to predict because of the distortions to resource allocation they entail.

But he suggested that the global economy seems to be robust, although greater concern now about inflation may lead to more monetary tightening.

"We will continue to do our best to make investment decisions in the best interests of the Exchange Fund in accordance with the guidance given by the Exchange Fund Advisory Committee," he wrote, continuing:

"But I must confess to having something of a conservative bias, at least as far as the money managed in-house by the authority is concerned, because we would like to keep what we have already made in the first nine months, in the hope that by the end of the year our performance really will meet the expectation of the Financial Secretary and the community."


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