Hong Kong's Future Fund advised to target alternatives

The Future Fund concept was proposed last year and Financial Secretary John Tsang announced in last week's budget that the vehicle would be set up this year.

In the second of two sets of recommendations on how the fund should operate, a government-appointed working group has suggested utilizing the HK$220 billion ($28 billion) land fund generated from government land sales - which has been the government's de factor standby facility since 1997-1998 - plus one quarter to a third of annual budget surpluses as periodic top-ups. It envisages a fund balance of HK$510 billion, or 14.7% of nominal GDP, by 2023-2024.

"The working group believes that the main objectives of the Future Fund should be a combination of ‘saving and investing,' ‘for the benefit of future generations, and ‘enhancing fiscal sustainability.' In practical terms, the working group recommends that the Future Fund should seek, within acceptable risks, higher returns through long-term investments," the report said.

It advocates at least a 10-year horizon before any withdrawals can be made from the fund.

Responsibility for managing the vehicle would fall with the Hong Kong Monetary Authority's exchange fund, which had HK$3,219.1 billion in assets as of January 2015 and has exposure to private equity and other alternatives. The rationale is that the future fund would benefit from the exchange fund's established investment infrastructure and expertise, as well as lower costs and balance of risk and return. The land fund has been placed with the exchange fund since 1998.

The working group studied long-term fiscal planning strategies in several developed economies. These included Australia and the report devotes a reasonable amount of attention to how the country developed its own Future Fund.

The Australian vehicle was set up in 2006 to assist the government in meeting the cost of public sector superannuation liabilities. It had total assets of A$109 billion ($85 billion) at the end of 2014, having received contributions totaling A$60.5 billion since inception, and has a target size of A$140 billion by 2020. Australia's Future Fund last year increased its private equity allocation to 9.5% and currently has A$10.4 billion invested in the asset class.

Hong Kong has experienced 10 successive years of budget surplus since 2004-2005 but the territory's ageing population is expected to increase the government expenditure burden while its revenues, and economic growth, slow. It is projected the elderly dependency ratio - the ratio of those aged 65 and above to those aged 15-64 - will increase from 18.3% in 2012 to 49.7% in 2041.

"The working group stresses that fiscal sustainability remains a serious issue. We must take timely and effective measures to address the problem. Our economy needs new growth areas, government expenditure growth needs to be contained and should be commensurate with the growth of GDP and government revenue, government revenue needs consolidation and reform to broaden the tax base, and savings for better returns should start before it is too late," said Elizabeth Tse, the working group's chair, in a statement.

The Future Fund is one of a number of areas relating to fiscal sustainability on which the working group has made recommendations.

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• Topics
• LPs
• Greater China
• Fundraising
• Hong Kong (China)
• LPs
• Fundraising
• Hong Kong Monetary Authority (HKMA)