Hong Kong’s state-owned investment fund that operates as a sovereign wealth fund
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What is the Hong Kong Monetary Authority Investment Portfolio?
The Hong Kong Monetary Authority Investment Portfolio is one of the distinct portfolios in the Exchange Fund run by the Hong Kong Monetary Authority (HKMA). It is Hong Kong’s state-owned investment fund that manages monetary policy and maintains monetary stability. The Exchange Fund finances the activities of the investment portfolio, which acts as a sovereign wealth fund.
The Hong Kong Management Authority (HKMA) Investment Portfolio is Hong Kong’s state-owned investment fund that operates as a sovereign wealth fund.
The backing portfolio and the investment portfolio are the two distinct portfolios in the Exchange Fund managed by the Hong Kong Management Authority.
The Hong Kong Management Authority Investment Portfolio is composed of held funds, liabilities, and accumulated surplus, which are held in the form of the Hong Kong dollar or foreign currency, gold, or silver.
Understanding the Hong Kong Monetary Authority Investment Portfolio
Exchange Fund Ordinance
The Exchange Fund was established in 1935 and became effective in 2009 when it started investing in private equity and private real estate under the Long-Term Growth Portfolio (LTGP). Its primary purpose is to back the Hong Kong dollar. The Exchange Fund serves an additional role of ensuring that the special administrative region’s financial and monetary systems are highly stable and exhibit a high level of integrity.
Since the transfer of the foreign exchange assets of the Government’s General Revenue Account and assets of the Coinage Security to the Exchange Fund, the resources available to regulate the exchange value of Hong Kong SAR have been centralized in the Fund.
Members of the Exchange Fund Advisory Committee (EFAC) serve as advisors to the Financial Secretary on matters of financial policies and other roles related to the Exchange Fund. Each month, HKMA releases four press statements on Exchange Fund data. HKMA also publishes annual financial statements of the Exchange Fund in its annual reports.
The Hong Kong Monetary Authority Investment Portfolio is one of the two Exchange Fund’s portfolios. The investment portfolio, under HKMA’s management, invests in bonds and equity markets in Organization for Economic Cooperation and Development (OECD) countries to reserve the Exchange Fund’s value and long-term purchasing power.
On the other hand, the backing portfolio fulfills the commitments of Convertibility Undertakings under the Linked Exchange Rate System, as well as managing a backing portfolio. However, the backing portfolio is not considered part of a sovereign wealth fund since it invests in high-quality and highly liquid U.S. dollar-denominated securities. The rest of the Exchange Fund’s assets are managed by the HKMA-appointed external fund managers.
HKMA is guided by the Exchange Fund’s investment objectives of diversifying risks and enhancing medium-to-long term returns and regular reviews. As of 2019, the HKMA reported assets worth $509.4 billion under its control. It is currently ranked as the fifth-largest foreign wealth fund globally.
Hong Kong Monetary Authority Investment Portfolio Composition
The Hong Kong Monetary Authority Investment Portfolio comprises held assets in the Exchange Fund, liabilities, and accumulated surplus. The securities are held in HKD or foreign currency, gold, or silver. The asset-allocation strategy of the Exchange Fund is governed by the investment benchmark, which factors in the potential risks of the fund, the required liquidity, and the long-term investment return. The Fund’s current benchmark allocation is 75% bonds and 25% equities, in terms of asset mix.
Decisions on strategic asset allocation and tactical asset allocation underpin the investment process of the Exchange Fund. The allocation of assets is done in a manner that attempts to attain accumulated surplus over the benchmark. The Monetary Base is also an essential component of the Exchange, as it shows liabilities and comprises certificates of indebtedness used to back currency notes, clearing accounts balance, bills, and notes, as well as coins issued.
Another essential component of the liabilities is the government’s fiscal reserves. The accumulated surplus, which represents the total net profit of the fund since its establishment, also makes part of HKMA composition.
Role of External Fund Managers in the Exchange Fund
The Hong Kong Monetary Authority taps the best investment expertise available in the market. HKMA diversifies the Exchange Fund into more sophisticated asset markets with the help of external managers. In such a way, the long-term returns of the portfolio are improved. Custodians are also appointed to provide services to externally managed portfolios and assist in valuing them.
HKMA primarily invests in the public sector, as the private sector is replete with cases of conflict of interest. To avoid such a challenge in the public sector, it allocates all of its equity portfolios to external managers in addition to creating firewalls between its banking systems and other departments.
External managers are selected based on qualitative and quantitative factors. The fund then allocates different classes of assets in a way that fully utilizes each portfolio manager’s skills and expertise.
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