Blessing in disguise for Tracker move

Editorial | Mary Ma 12 Jan 2021

Many eyeballs nearly popped out when the SAR's pride, the Tracker Fund of Hong Kong, told investors it won't be able to increase its stakes in some Chinese companies because they are sanctioned by the US - even though these companies constitute the city's Hang Seng Index.

What? That was the incredulous response yesterday.

Admittedly, it failed to pop as many eyeballs as when MSCI said last week it was removing several Chinese telecom firms, also because of the US ban on Chinese companies considered to be related to the Chinese military.

But TraHK's announcement was somehow bizarre because - unlike MSCI, which is American - TraHK is a Hong Kong entity with a local mandate and little to do with the US.

The most remote link it has to the US is its fund manager, State Street - a Boston-based financial services and bank holding company.

It is only because of the fund manager's American identity that the Hong Kong fund has to keep itself from the affected Chinese companies, even though they are Hang Seng Index constituents.

It makes no sense, right? It seems that the fund manager, not the owners, has become the master.

It is most likely that, prior to the TraHK announcement, Financial Secretary Paul Chan Mo-po was advised of the dilemma facing the tracker fund.

It is still too soon to predict whether the fund manager will eventually be replaced by a non-American.

But the unfolding event, though unexpected, does provide the authority with a golden opportunity to reconsider whether or not it is still appropriate to benchmark the HK$109 billion fund so closely against the Hang Seng Index.

That's because the HSI is not producing a return as attractive as a number of other index-tracking funds.

Since TraHK's launch in November 1999 following a spectacular battle between the Hong Kong government and currency attackers in the local stock market, the HSI has less than doubled from a little more than 15,300 to just above 27,900.

During the same period, the Dow Jones Industrial Average, for example, has almost tripled from around 10,800 to above 31,000.

Had the SAR fund been given a freer hand to invest according to the market intelligence of the time, it might have made greater returns for investors. Of course, this had to be made on the understanding of greater volatility as a result.

Much has changed in the economic trend since the fund was inaugurated - even the Hang Seng Indexes Company has launched a tech index to reflect the new-economy boom.

It's true that the birth of TraHK was a little accidental against a dramatic historical background. If the dollar peg had not come under attack in 1998, the government would not have been forced to intervene in the market to acquire a substantial portfolio of Hong Kong shares in August that year, which gave rise to the TraHK a year later.

The fund's mandate to mirror the HSI no longer suits the trend. Now comes the opportunity to modernize the mandate - even if the fund manager is changed at the end of the day.

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