Cautious investor: Monetary Authority Chief Executive Joseph Yam warns that the investment environment in 2005 will be difficult.

The Exchange Fund recorded an investment income of $56.7 billion in 2004, Monetary Authority Chief Executive Joseph Yam says.

Speaking at a press conference today, Mr Yam said there were four main components of the investment income.

They included:

* total return from bonds and other investments of $25 billion;

* valuation gain on, and dividends from, the Hong Kong equities portfolio amounting to $12 billion;

* valuation gain on, and dividends from, other equities amounting to $11.2 billion; and

* an exchange valuation gain of $8.5 billion, mainly as a result of the appreciation of the euro against the US dollar.

$52.1b of net investment income recorded 

After deducting interest and other expenses, net investment income in 2004 was $52.1 billion. Of this, the fiscal reserves share amounted to $14.5 billion, which exceeded the amount budgeted ($12.3 billion) in the fiscal year 2004-05. 

An amount of $38.5 billion, being the net investment income after deducting the fiscal reserves share ($37.6 billion) together with part of a premises revaluation surplus ($0.9 billion), has been added to the Exchange Fund's accumulated surplus for 2004. 

At the end of 2004 the accumulated surplus stood at $423.4 billion.

2004 saw volatile markets

Commenting on the Exchange Fund results for 2004, Mr Yam said the investment environment in 2004 had been volatile.

"In the first half of the year, bond and equity markets retreated on fears of aggressive monetary tightening in the US. Losses were recouped when equity markets and currencies rebounded in the last few months of the year," Mr Yam said.

The abridged balance sheet shows that in 2004 the total assets of the Exchange Fund increased by $50.3 billion, from $1.012 trillion at the end of 2003 to $1.062 trillion at the end of 2004.

Investment return of 5.7% achieved

In 2004 the Exchange Fund achieved an investment return of 5.7%, which met the investment return of the benchmark portfolio determined by the Financial Secretary after consultation with the Exchange Fund Advisory Committee. 

Since 1999 the Exchange Fund has achieved a 6.2% annual return, or an annual out-performance of 1.4% above the benchmark's 4.8% annual return for the same period. 

Since 1994 the Exchange Fund has generated an annual return of 6.6%, compared with the annual inflation rate of 1.3% over the same period.

2005 investment environment will be 'difficult'

Mr Yam warned that the investment environment in 2005 would be difficult.

"The markets have begun the year in a highly volatile way, and this volatility is likely to continue," Mr Yam said. 

"The HKMA will exercise vigilance in this erratic environment and will continue, under the guidance of the Exchange Fund Advisory Committee, to manage the Exchange Fund in a prudent manner."