That the Exchange Fund enjoyed a good year in 2006 is already old news: the Fund earned an investment return of $103.8 billion, a rate of return of 9.5%. This exceeded the rate of return of the benchmark portfolio approved by the Financial Secretary on the advice of the Exchange Fund Advisory Committee (EFAC) by more than 0.6%. The share of the investment income going to the fiscal reserves placed with the Exchange Fund was $28.9 billion.

Good results are always welcome, of course. We are glad to have contributed to a healthy investment return for the people of Hong Kong. But we are also very conscious that this is not the primary purpose of the Exchange Fund. The purposes and investment objectives of the Fund are set out in detail in the Reserves Management chapter: in essence, the Fund is there to back the Hong Kong dollar, and to do that it has to be held primarily in liquid US dollar assets and its investment objectives emphasise capital preservation and liquidity. I have said this many times but perhaps it bears repeating once more: the Exchange Fund has to be invested, but it is not an investment fund and investment is not its primary purpose.

The implication of this is that we cannot and should not expect high returns from the Fund every year. Like the savings that many of us hold, the Exchange Fund can be thought of as rainy-day money: we want to get a good return on it but we must always remember that we might need it for some emergency and therefore be prudent in how we invest it. Looking ahead to 2007, I believe that caution is called for. While I believe we did well in outperforming the benchmark, the overall results of 2006 were due in large part to equities and bond markets rising together towards the end of the year and a number of equities markets in particular reaching historic highs. We all understand that markets are cyclical and when you reach high levels, the outlook for the future is uncertain at best.