Hong Kong Baptist University 1998 Superannuation Fund

Report for 2Q 2004

Hong Kong Baptist University1998 Superannuation Fund

Hong Kong Baptist University 2

Contents

• Portfolio Size Summary

• Performance Summary

• Asset Allocation

• Performance Review

• Current Investment Strategy and Market Outlook

Portfolio Size Summary


Portfolio Size Summary

MLIIF US Dollar Global Bond Stable Fund

US$ HK$ US$ HK$

30 July 2004 958,130.71 7,473,131.14* 1,084,438.76

8,458,622.33+

* 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.

Performance Summary


Performance Summary

MLIIF US Dollar Global Bond Stable Fund

Actual %1 Benchmark %2 Actual %3 Benchmark %4

July 2004 0.46 0.52 -1.13 -0.61

June 2004 -0.33 -0.01 0.69 0.61

May 2004 -0.16 -0.20 0.04 0.13

2Q 2004 -1.58 -1.50 -0.25 -0.78

YTD (1 January 04 – 30 July 04) 0.44 0.94 -0.05 0.75

Inception-to-date (26 April 02 – 30 July 04) 8.45 10.36 8.44 11.10

Remarks: 1. Performance figures are net of 1.15% management fee and after 0.75% rebate.2. Citigroup WGBI - 18 US $ Hdgd3. 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)

As at 30 July 2004

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.


-0.3 -0.1

8.4

-0.8

0.8

11.1

-1.6

0.4

8.5

-1.5

0.9

10.4

As of 30 July 2004

Performance Summary

MLIIF USD Global Bond Fund * Stable Fund **

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

Fund Benchmark

Since inceptionYTD2Q 04 Since inceptionYTD2Q 04


-1.1

-0.3-0.1

-3.3

0.9

-0.9

0.5

-1.6

0.4

-3.3

0.9

-0.9

As of 30 July 2004

Performance Summary

MLIIF USD Global Bond Fund * Stable Fund **

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

Fund MSCI World

YTDJuly 2Q 04 YTDJuly 2Q 04


0.0%

1.1%

0.4%

4.0%4.6%

0.7%

As of 29 July 2004

Actual Returns on Funds*

MLIIF USD Global Bond Fund

Assuming a constant contribution on Every 29th of the Month and the Funds

stay without switching

Source: MLIM* Performance figures are net of management fee but are gross of rebates

1 year Since Inception

Stable Fund

2 years1 year Since

Inception2 years

Asset Allocation


MLIIF US Dollar Global Bond Fund (%)

4.7

59.2

20.7

15.4

By Region, as at 30 July 2004

MLIIF US Dollar Global Bond Fund

* Citigroup WGBI - 18 US $ Hdgd Source: Internal; Datastream

The Fund Benchmark*(%) (%)

North America 4.7 23.0

Europe 59.2 47.2

Japan 15.4 28.7

Other 0.0 1.1

Cash 20.7 0.0

Total 100 100

Benchmark* (%)

22.4

47.0

29.8

0.8


Benchmark* (%)

30

70

Stable Fund (%)

42.8

42.9

14.3

By Asset Class, as at 30 July 2004

Stable Fund

The Fund Benchmark* (%) (%)

Equities 42.8 30.0

Bonds 42.9 70.0

Cash 14.3 0.0

Total 100 100

* 70% Citigroup WGBI - 18 US $ Hdgd and 30% MSCI World (net)Source: Internal; Datastream


By Region, as at 30 July 2004

Stable Fund

* 70% Citigroup WGBI - 18 US $ Hdgd and 30% MSCI World (net)Source: Internal; Datastream

Stable Fund (%)

22.6

15.6

4.3

0.310.9

25.4

6.6

14.3

The Fund Benchmark*

(%) (%)

Equities


Europe 15.6 8.8

Japan 4.3 3.0

Pacific Basin 0.3 1.0

Total Equities 42.8 30.0

Bonds


Europe 25.4 33.0

Japan 6.6 20.1

Other 0.0 0.8

Total Bonds 42.9 70.0

Cash 14.3 0.0

Total Fund 100 100

Benchmark* (%)

17.2

3.0

1.0

16.133.0

20.0

0.8

8.8


Stable Fund* (%)

26.4

13.6

11.410.6

10

9.3

9.1

4.6 31.7 0.3

By Sector, as at 30 July 2004

Stable Fund

Benchmark+ (%)

23.8

12.2

12.110.3

9

11.1

8

4.94.9 3.7

* Allocation only includes the equity portion of Stable Fund.+ MSCI World (net)Source: Internal; Datastream

The Fund* Benchmark+

(%) (%)

Financials 26.4 23.8

Consumer Dis. 13.6 12.2

Information Tech. 11.4 12.1

Industrials 10.6 10.3

Consumer Staples 10.0 9.0

Healthcare 9.3 11.1

Energy 9.1 8.0

Materials 4.6 4.9

Telecoms Services 3.0 4.9

Utilities 1.7 3.7

Cash 0.3 0.0

Total 100 100

Performance Review




• 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

Performance Review

Stable Fund


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.

Performance Review

Major Markets Summary


Major Markets Summary

Jul-04 Q2-04 YTD

% % %

MSCI Hong Kong (27.0%) 1.4 -4.4 3.6MSCI North America (14%) -3.2 1.6 0.1MSCI Europe (9%) -2.8 2.5 1MSCI Japan (5%) -5.9 -3.7 4.7ALL COUNTRIES MSCI Pacific free ex Japan & Hong Kong (7.5%) -1.8 -7.7 -1.9MSCI Emerging Markets Free (7.5%) -1.8 -9.5 -2.1Lehman Global Agg.Bond (50% hedged)(27%) 0.3 0.5

Thailand (SET) (Price Index) local currency -1.5 -0.1 -17.5Indonesia (JCI) (Price Index) local currency 3.4 -0.5 9.4Philippines (PHISX) (price Index) local currency 0.3 10.9 9.9Korea (KOSPI) -6.4 -10.8 -9.3Taiwan (weighted) (Price Index) local currency -7.2 -10.5 -8Mexico (IPC) (price Index) local currency -1.6 -2.2 15MSCI World in (price index) HK$ -3.3 0.4 -0.44Hang Seng (price Index)(local currency) -0.4 -3.1 -2.7S&P 500 total return in HK$ -3.3 1.7 0.5MSCI Europe ex UK (price Index) in HK$ -3.8 1.2 -2.26FT All Share (UK) (total Return) HK$ -1.3 1.1 3.3HK Dollar to Japanese Yen -3.93 -4.21 -2.73HK Dollar to Sterling (Sterling to HK Dollar) -0.3 1.2 -2HK Dollar to Euro (Euro to HK Dollar) 1.1 0.9 4.3HK Dollar to Aus Dollar -9.22 1.45 -6.37

All indices in HK dollar terms except where indicated

Investment Outlook


Global real short rates remain close to zero

Source: Datastream

G3 Real Short Rates

%

1999 2000 2001 2002 2003 2004-1.0

-0.5

0

0.5

1.0

1.5

2.0

2.5


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


Headwinds are building

• High oil price

• Excessive debt

• Tightening global monetary conditions - UK, Australia, China, US, New Zealand and Switzerland


China’s credit slowdown

Source: Datastream

%

2001 2002 2003 20040

5

10

15

20

25

30

Loans, Y/Y M2 Money Supply, Y/Y


Earnings cycle is maturing

World real EPS

Source: MSCI, MLIM

US

$

MSCI World actual EPS ($, 1995 prices) Trend EPS

15

20

25

30

35

40

45

80 82 84 86 88 90 92 94 96 98 00 02 04


Global earnings momentum is peaking

Source: IBES

-6

-4

-2

0

2

4

6

8

10

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

-80

-60

-40

-20

0

20

40

60

Lead Economic Indicator Rate of Upgrade, % FY1 EPS

Global Earnings Revisions


Source: MLIM

World P/NE

Global equity valuations back at top of pre-bubble range

5

10

15

20

25

30

35

40

45

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


US valuation gap with Europe has widened

Europe US

Source: MLIM

5

10

15

20

25

30

35

40

45

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

P/NE


Source: MLIM; Citigroup. As at 31 May 2004

Medium term implied earnings growth

Technology valuations have returned to extremes

Co

ns

Sta

ple

s-15

-10

-5

0

5

10

15

20

25

30

Util

itie

s

En

erg

y

Fin

an

cia

ls

He

alth

care

Ma

teria

ls

Ind

ust

rials

Ma

rke

t

Co

ns

Dis

cre

tion

Te

leco

ms

Info

Te

ch

%


Growth styles becoming more attractive

Source: Citigroup, MLIM

Ratio of dividend yield - growth vs valueR

ati

o %

0.33

0.38

0.43

0.48

0.53

0.58

0.63

0.68

0.73

1990 1992 1994 1996 1998 2000 2002 2004

DY +2 SD Mean -2 SD

Expensive

Cheaper


Value is appearing in short duration bonds

Source: MLIM

Eurozone 2-year yield deviation from fair value

-3

-2

-1

0

1

2

3

01/93 01/95 01/97 01/99 01/01 01/03 01/05

No

. o

f S

tan

da

rd D

evi

atio

ns


Value is appearing in short duration bonds

Source: MLIM

US 2-year yield deviation from fair value

-3

-2

-1

0

1

2

3

01/93 01/95 01/97 01/99 01/01 01/03 01/05

No

. o

f S

tan

da

rd D

ev

iati

on

s


Investment grade credit offers little value

Source: Bloomberg

Basis points

0

20

40

60

80

100

120

140

160

180

200

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


Still some value in high yield

High Yield spread over Treasuries

0

2

4

6

8

10

12

14

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

%

Source: MLIM


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


Asset allocation stance


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.


Documents

Hong Kong Baptist University 1998 Superannuation Fund