Established just over three years ago to boost the investment return on Hong Kong's fiscal reserves, the city's Future Fund looks set now to invest even more heavily in alternative assets.

With about half of the fund's assets already placed in a portfolio that invests in such assets as international property and private equity, Financial Secretary Paul Chan outlined the fund's souped-up new strategy in his budget speech for Hong Kong on Wednesday (February 27). 

Paul Chan

“To further optimise the use of the [Future] Fund, I will invite several experienced persons in the financial services sector to advise me on the Fund's investment strategies and portfolios to achieve more diversified investments,” he said.

And in a subsequent emailed reply, a spokesman for the Hong Kong Financial Services and the Treasury Bureau (FSTB) told AsianInvestor that could mean yet more funds being invested in alternatives.

“More than 50% of the Future Fund may be set aside for placement with the Exchange Fund's long term growth portfolio (LTGP),” he said.

The Future Fund was seeded at the start of 2016 with an initial HK$219.7 billion ($28.35 billion) investment, subject to periodic top-ups. It was placed with the Exchange Fund, which is used by the Hong Kong Monetary Authority (HKMA) to help manage the Hong Kong dollar, for an initial 10-year period.

At the time it was stipulated that the portion of the Future Fund placed with the LTGP would gradually build to around 50% by the end of 2018. The LTGP includes private equity and foreign property investments and it has recorded an annualised internal rate of return of about 13.8% since its inception in 2009 up to the end of September 2018.

“As a long-term savings scheme, we hope that the Future Fund can bring about more aggressive returns to support our increasing spending needs in future," the Hong Kong government said in a 2015 release announcing the establishment of the fund.

“Hong Kong has generally lagged other institutional markets when it comes to pushing for greater diversification or pursuing innovation,” Jayne Bok, head of investments for Asia at Willis Towers Watson, told AsianInvestor. “It’s great to see that HKMA is taking diversity seriously given they are seen as role models for the HK market.”

Financial Secretary Chan has invited several leaders from the business sectors to make recommendations on the investment strategies and portfolios of the Future Fund, the FSTB spokesman said.

The FSTB spokesman said Victor Fung, chairman of supply chain management giant Fung Group and advisor of the HKMA's Infrastructure Financing Facilitation Office, will lead the group of business leaders advising Chan on the Future Fund's future strategy. Peter Wong, deputy chairman and Asia Pacific chief executive of HSBC, and outgoing HKMA chief executive are also among them, he added.

The Future Fund is described as an "integral part of the fiscal reserves", which Chan said are expected to top HK$1.16 trillion by the financial year-end on March 31.

EXCHANGE FUND

The Exchange Fund, meanwhile, has at most one-third of its accumulated surplus invested in LTGP, which may have helped to cushion it from the negative impact of volatile equity markets last year.

The Exchange Fund overall recorded an investment income of HK$13.9 billion in 2018. It lost HK$20.7 billion from Hong Kong equities and HK$38.3 billion for other equity investments. However, it gained HK$24.5 billion from its 'other investments' (primarily from its LTGP stake), which were the fund's second-largest income contributor after bonds.

Several risk factors intensified during the year, including changes in US monetary policy and international trade tensions, resulting in considerable market volatility, and yet the Exchange Fund still didn't report a loss, Norman Chan, chief executive of the HKMA, said earlier in January when the result of the Exchange Fund was announced.

The Exchange Fund returned 0.3% versus 7.1% in the previous year.

Given how weak markets were last year, that isn't such a devastating return; many institutions would have been quite happy with it, Paul Colwell, senior director for Asian investments at Willis Towers Watson, told AsianInvestor.

The Exchange Fund, which is tasked with maintaining the currency peg against the US dollar, held more than HK$4 trillion worth of assets as of end 2017. It employed external fund managers to manage about 27% of its assets, including all of its listed equity portfolios and other specialised asset classes, according to its latest annual report.