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Hong Kong Baptist University 1998 Superannuation Fund

Hong Kong Baptist University 1998 Superannuation Fund. Report for 2Q 2004. Contents. Portfolio Size Summary Performance Summary Asset Allocation Performance Review Current Investment Strategy and Market Outlook. Portfolio Size Summary. Portfolio Size Summary.

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Hong Kong Baptist University 1998 Superannuation Fund

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  1. Hong Kong Baptist University1998 Superannuation Fund Report for 2Q 2004

  2. Contents • Portfolio Size Summary • Performance Summary • Asset Allocation • Performance Review • Current Investment Strategy and Market Outlook Hong Kong Baptist University

  3. Portfolio Size Summary

  4. Portfolio Size Summary * The exchange rate is the deal FX rate, which is 7.799699 HKD/USD as of 30 July 2004. + The exchange rate is based on the spot rate from Bloomberg, which is 7. 8000 HKD/USD as of 30 July 2004. Hong Kong Baptist University

  5. Performance Summary

  6. Performance Summary As at 30 July 2004 Remarks: 1. Performance figures are net of 1.15% management fee and after 0.75% rebate. 2. Citigroup WGBI - 18 US $ Hdgd 3. Performance figures are net of 1.15% management fee and after 0.70% rebate. 4. 70% Citigroup WGBI - 18 US $ Hdgd and 30% MSCI World (net) Note: The performance figures for the Stable Fund are based on month-to-month data except for the since inception performance that is based on cumulative since inception return. Hong Kong Baptist University

  7. Fund Benchmark Performance Summary As of 30 July 2004 Stable Fund ** MLIIF USD Global Bond Fund * 2Q 04 YTD Since inception 2Q 04 YTD Since inception Remarks: * Performance figures: USD Global Bond Fund - net of 1.15% management fee and after 0.75% rebate. Benchmark: Citi WGBI - 18 US $ Hdgd. **Performance figures are net of 1.15% management fee and after 0.70% rebate. Benchmark is 70% Citi WGBI - 18 US $ Hdgd and 30% MSCI World (net) in HK$. Source: Merrill Lynch Investment Managers Hong Kong Baptist University

  8. Fund MSCI World Performance Summary As of 30 July 2004 Stable Fund ** MLIIF USD Global Bond Fund * YTD July YTD 2Q 04 July 2Q 04 Remarks: * Performance figures: USD Global Bond Fund - net of 1.15% management fee and after 0.75% rebate. Benchmark: Citi WGBI - 18 US $ Hdgd. **Performance figures are net of 1.15% management fee and after 0.70% rebate. Benchmark is 70% Citi WGBI - 18 US $ Hdgd and 30% MSCI World (net) in HK$. Source: Merrill Lynch Investment Managers Hong Kong Baptist University

  9. Actual Returns on Funds* As of 29 July 2004 • Assuming a constant contribution on Every 29th of the Month and the Funds stay without switching Stable Fund MLIIF USD Global Bond Fund 1 year 2 years Since Inception 1 year 2 years Since Inception Source: MLIM *Performance figures are net of management fee but are gross of rebates Hong Kong Baptist University

  10. Asset Allocation

  11. MLIIF US Dollar Global Bond Fund By Region, as at 30 July 2004 * Citigroup WGBI - 18 US $ Hdgd Source: Internal; Datastream Hong Kong Baptist University

  12. Stable Fund By Asset Class, as at 30 July 2004 * 70% Citigroup WGBI - 18 US $ Hdgd and 30% MSCI World (net) Source: Internal; Datastream Hong Kong Baptist University

  13. Stable Fund By Region, as at 30 July 2004 * 70% Citigroup WGBI - 18 US $ Hdgd and 30% MSCI World (net) Source: Internal; Datastream Hong Kong Baptist University

  14. Stable Fund By Sector, as at 30 July 2004 * Allocation only includes the equity portion of Stable Fund. + MSCI World (net) Source: Internal; Datastream Hong Kong Baptist University

  15. Performance Review MLIIF US Dollar Global Bond Fund

  16. MLIIF US Dollar Global Bond Fund • Our underweight US bond market position impacted negatively on the Fund’s relative performance in July. Yields moved from 4.56% to 4.35% before moving back to 4.46%. The fall in yields at the start of the month led the Fund to underperform the US dollar bloc. • Positioning in the euro-zone had no material impact on overall performance, however the relative value trade out of the US into Europe contributed positively. • Being underweight Japanese bonds during a period that saw yields rise, was positive and the currency positioning also had a small positive impact on performance Hong Kong Baptist University

  17. Performance Review Stable Fund

  18. Stable Fund • The Fund underperformed in July. The performance suffered from our underweight in US bonds, despite the positive contribution from our stock selection in the equity side. • On the equity side, relative performance benefited from stock selection within information technology (IT) notably high quality, cash generative businesses such as Microsoft and Dell, which outperformed. • A number of IT companies failed to meet the market’s high expectations leading to sharp declines for many stocks we did not hold - Veritas Software, Texas Instruments and Nokia. • In energy our focus on companies with attractive asset and production profiles was rewarded as high oil prices led to gains for stocks such as Suncor, Talisman and BP. Hong Kong Baptist University

  19. Performance Review Major Markets Summary

  20. Major Markets Summary Hong Kong Baptist University All indices in HK dollar terms except where indicated

  21. Investment Outlook

  22. % 2.5 2.0 1.5 1.0 0.5 0 -0.5 -1.0 1999 2000 2001 2002 2003 2004 G3 Real Short Rates Global real short rates remain close to zero Source: Datastream Hong Kong Baptist University

  23. Tailwinds will fade during H2 2004 • Monetary and fiscal stimulus • Cost cutting • Impact of steepening yield curve on financial sector earnings • Narrowing gap between reported and operating earnings Hong Kong Baptist University

  24. Headwinds are building • High oil price • Excessive debt • Tightening global monetary conditions - UK, Australia, China, US, New Zealand and Switzerland Hong Kong Baptist University

  25. China’s credit slowdown % 30 25 20 15 10 5 0 2001 2002 2003 2004 Loans, Y/Y M2 Money Supply, Y/Y Source: Datastream Hong Kong Baptist University

  26. 45 40 35 US$ 30 25 20 15 80 82 84 86 88 90 92 94 96 98 00 02 04 MSCI World actual EPS ($, 1995 prices) Trend EPS Earnings cycle is maturing World real EPS Source: MSCI, MLIM Hong Kong Baptist University

  27. Global earnings momentum is peaking Global Earnings Revisions 10 60 8 40 6 20 4 0 2 -20 0 -40 -2 -60 -4 -6 -80 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Lead Economic Indicator Rate of Upgrade, % FY1 EPS Source: IBES Hong Kong Baptist University

  28. 45 40 35 30 25 20 15 10 5 70 71 72 73 74 75 76 77 78 79 80 82 83 84 85 86 87 88 89 90 91 92 93 95 96 97 98 99 00 01 02 03 04 Global equity valuations back at top of pre-bubble range World P/NE Source: MLIM Hong Kong Baptist University

  29. US valuation gap with Europe has widened P/NE 45 40 35 30 25 20 15 10 5 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 Europe US Source: MLIM Hong Kong Baptist University

  30. Technology valuations have returned to extremes Medium term implied earnings growth % 30 25 20 15 10 5 0 -5 -10 -15 Market Energy Utilities Materials Info Tech Telecoms Financials Industrials Healthcare Cons Discretion Cons Staples Source: MLIM; Citigroup. As at 31 May 2004 Hong Kong Baptist University

  31. 0.73 Cheaper 0.68 0.63 0.58 Ratio % 0.53 0.48 0.43 Expensive 0.38 0.33 1990 1992 1994 1996 1998 2000 2002 2004 DY +2 SD Mean -2 SD Growth styles becoming more attractive Ratio of dividend yield - growth vs value Source: Citigroup, MLIM Hong Kong Baptist University

  32. 3 2 1 No. of Standard Deviations 0 -1 -2 -3 01/93 01/95 01/97 01/99 01/01 01/03 01/05 Value is appearing in short duration bonds Eurozone 2-year yield deviation from fair value Source: MLIM Hong Kong Baptist University

  33. 3 2 1 No. of Standard Deviations 0 -1 -2 -3 01/93 01/95 01/97 01/99 01/01 01/03 01/05 Value is appearing in short duration bonds US 2-year yield deviation from fair value Source: MLIM Hong Kong Baptist University

  34. Basis points 200 180 160 140 120 100 80 60 40 20 0 31/01/97 31/01/98 31/01/99 31/01/00 31/01/01 31/01/02 31/01/03 31/01/04 US Credit spread European A Credit spread Investment grade credit offers little value Source: Bloomberg Hong Kong Baptist University

  35. % 14 12 10 8 6 4 2 0 31/01/82 30/04/83 31/07/84 31/10/85 31/01/87 30/04/88 31/07/89 31/10/90 31/01/92 30/04/93 31/07/94 31/10/95 31/01/97 30/04/98 31/07/99 31/10/00 31/01/02 30/04/03 ML High Yield 175 Index YTM spread over 5-year Treasury benchmark Still some value in high yield High Yield spread over Treasuries Source: MLIM Hong Kong Baptist University

  36. So where from here? • Focus on equity markets where valuations are reasonable and growth will be sustained • Opportunities exist in larger capitalisation stocks, particularly in Europe and Japan • Invest in short duration bonds and selected credit Hong Kong Baptist University

  37. Asset allocation stance Hong Kong Baptist University

  38. The following notes should be read in conjunction with the attached document: 1. Issued by Merrill Lynch Investment Managers Limited, authorised and regulated by the Financial Services Authority and a subsidiary of Merrill Lynch & Co., Inc. Merrill Lynch Investment Managers is a trading name of Merrill Lynch Investment Managers Limited. Merrill Lynch & Co., Inc. and its subsidiaries are known as the Merrill Lynch Group. 2. Past performance is not necessarily a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. 3. Any research in this document has been procured and may have been acted on by Merrill Lynch Investment Managers for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the Merrill Lynch Group or any part thereof and no assurances are made as to their accuracy. 4. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any Merrill Lynch Group funds and has not been prepared in connection with any such offer. 5. This material is for distribution to Intermediate Customers (as defined by the FSA Rules). Unless otherwise specified, all information contained in this document is current as at July 2004. Hong Kong Baptist University

  39. Hong Kong Baptist University

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