Information Note for the Legislative Council
Panel on Financial Affairs
Exchange Fund Investment Limited's Proposal to Dispose the Securities Acquired During the August 1998 Operation
Introduction
This note informs Members of the plan of Exchange Fund Investment Limited (EFIL) for the disposal of the shares acquired by the Government during the market operations in August 1998 in the form of a unit trust product.
Details
2. At the Board Meeting on 21 June, EFIL's Directors, having considered the recommendations of the three financial advisers on the optimal disposal strategy for the Exchange Fund's Hong Kong equity portfolio, concluded that it would be appropriate to launch the disposal programme in the form of a unit trust product tracking the Hang Seng Index ("HSI").
3. Compared with other disposal methods, the unit trust approach, as a first step, offers a number of advantages : -
- it can cater for the needs of both retail and institutional investors. Block placements and company buybacks are generally not open to retail participation whereas exchangeable bonds would be an unfamiliar product for retail investors;
- it does not involve the selection of individual stocks and is therefore "market neutral". The stock selection involved in a block placement might lead to speculation in the market as to the next stock likely to be placed and might impact adversely on the market; and
- it is likely to cause the least disruption to the market.
Whilst EFIL will focus on the unit trust product in launching the disposal programme, other disposal methods may however be considered for subsequent phases of the programme.
4. In view of the intense public interest in the disposal of the Exchange Fund's Hong Kong equity portfolio, EFIL considered it appropriate to inform the public as soon as it had taken a view on the optimal strategy for the launch of the disposal programme. It has been suggested that EFIL has not provided enough details on the proposed unit trust product. In this connection, EFIL could have deferred the announcement of the adoption of the unit trust for the launch of the programme until all the details had been finalized. However, EFIL considered it appropriate to inform the public of EFIL's intention at the earliest possible opportunity.
5. A considerable amount of preparatory work will be required to develop the design and structure of the proposed unit trust product. Market research is being conducted to ascertain more precisely investor appetite and preferences amongst institutional and retail investors. The needs of retail investors will be taken into consideration in structuring the unit trust, for instance in fixing the minimum denomination of the units. After preparing the necessary documentation, listing and other regulatory approvals will need to be sought from the relevant authorities. It is envisaged that an extensive marketing programme to promote this new investment product, both locally and overseas, will be conducted. It is expected that the preparatory work would take at least four to five months to complete. Apart from getting ready in terms of documentation and procedures, the decision to launch this unit trust product and the timing of the launch will depend on the prevailing market conditions.
6. Since the announcement by EFIL, a number of questions or comments have been raised regarding the unit trust product. Some of these issues are addressed below :-
- Ongoing Administration of the Unit Trust
The trust would be administered by a trustee and the underlying shares would be managed by a fund manager. The trustee and the fund manager will be independent of EFIL and the Government. It is envisaged that the unit trust will contain all 33 HSI constituent stocks and will replicate the HSI as far as practicable. Periodic rebalancing of the portfolio is expected to be carried out by the fund manager to reflect changes in the HSI. The trustee will have fiduciary duties to act in the interests of unitholders.
- Liquidity
It is intended that an application should be made for the units to be listed on the Stock Exchange of Hong Kong. This would create a new product traded on the Exchange which could be equated to a secondary offering of all 33 stocks packaged together and thus adds liquidity to the market.
The Standard & Poor's Depository Receipts ("sPDRs") in the US allows for redemption in kind enabling investors to redeem units for shares from the SPDRs trust. If the same approach were adopted for the unit trust product, it would return some liquidity to the market when investors redeem units for shares.
- Issue Size and Pricing
It is obviously too early to consider issue size and pricing of the unit trust product, which will depend on investors' appetite and the prevailing market conditions.
Exchange Fund Investment Limited
28 June 1999
