HONG KONG -- In August 1998, Hong Kong's government bought a chunk of the stock market when the local exchange -- along with markets around the world -- were in turmoil.
At the time, the government intervened and bought about 10% --$16 billion -- of the local market cap. All dollar amounts are in U.S. dollars unless otherwise specified.
Last November, the government bundled together more than 15% of these shares into a publicly traded unit trust, the Hong Kong Tracker Fund, and sold them to the public.
The result, by most accounts, "has been a much bigger success than anyone thought it was going to be," said Vincent Duhamel, principal and chief executive with State Street Global Advisors in Hong Kong, which manages the Tracker Fund.
State Street Bank and Trust Co. is the trustee.
SSgA manages about $4 billion in assets from Southeast Asia, mainly Hong Kong, Singapore and Korea.
With shares initially priced at H.K.$12.88 (U.S.$1.66), the fund was up 34.3% when it reached its high of H.K.$17.30 per share in January. At the end of January, it had fallen back to H.K.$15.85 per share. As of Feb. 24 it was at H.K.$17.21 per share.
Investors in the fund, essentially, are buying a piece of the Hang Seng index, which is made up of 33 stocks.
But other money managers are also cheering the Tracker Fund's success.
As Hong Kong changes its pension laws, the Tracker Fund came out at a time when the local money management business needed to boost its profile. It has drawn positive attention from the public to the money management and mutual fund industry.
"The tracker fund is an unqualified positive for the development of the fund management business" in Hong Kong, said Nicholas Rogers, director of marketing, defined contribution with Schroder Investment Management (Hong Kong) Ltd.
Less than 5% of the population knows anything about unit trusts, which are like mutual funds, Mr. Duhamel said.
When the Tracker Fund was launched, demand for shares outstripped the $4.3 billion in available shares by $2.7 billion.
The fund, in effect, was the biggest public offering ever in Asia. It's listed on the Hong Kong Stock Exchange.
About one-third of the shares went to institutional investors such as local and overseas pension funds, private banks and insurance companies. The rest went to retail investors.
The purpose of the fund was to prevent flooding the market when the government sold its positions, Mr. Duhamel said. "The argument is, when the government starts selling shares, how would you liquidate holdings on a stock-by-stock basis?"
Another result was broadening the ownership of Hong Kong stocks, he added.
Because of the government's role, the Tracker Fund is extremely high profile, he said. The fund offers a variety of incentives to encourage individual share holders to stay in the fund long-term.
Among the biggest is a "loyalty bonus" in which investors who hold their shares for one year receive 5% more shares, he said. After two years, the bonus goes up to 7.5%.
Institutions don't get loyalty bonuses, he said. So far, there's been close to 25% turnover in the fund.
But some in Hong Kong's money management industry said investors didn't fully understand the potential risk in investing in an equity unit trust fund. Market observers said some retail investors thought they were buying an investment product that's guaranteed by the government.
In the end, the Tracker Fund is likely to be a one-time deal. "The government is saying there won't be other tracker funds," Mr. Duhamel said.