Hong Kong Baptist University 1998 Superannuation Fund Report for 4Q 2002

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

Portfolio Size Summary

Portfolio Size Summary * The exchange rate is the deal FX rate, which is 7.798499 HKD/USD as of 31 December 2002. ** The exchange rate is the deal FX rate, which is 7.799849 HKD/USD as of 31 January 2003. + The exchange rate is based on the spot rate from Bloomberg, which is 7.7986 HKD/USD as of 31 December 2002. ++ The exchange rate is based on the spot rate from Bloomberg, which is 7.7998 HKD/USD as of 31 January 2003. Hong Kong Baptist University

Performance Summary

Performance Summary As at 31 December 2002 Remarks: 1. Performance figures are net of 1.15% management fee and after 0.75% rebate. 2. SSB WGBI - 18 US $ Hdgd 3. Performance figures are net of 1.15% management fee and after 0.70% rebate. 4. 70% SSB WGBI - 18 US $ Hdgd and 30% MSCI World (net) Hong Kong Baptist University

Performance Summary As at 31 January 2003 Remarks: 1. Performance figures are net of 1.15% management fee and after 0.75% rebate. 2. SSB WGBI - 18 US $ Hdgd 3. Performance figures are net of 1.15% management fee and after 0.70% rebate. 4. 70% SSB WGBI - 18 US $ Hdgd and 30% MSCI World (net) Hong Kong Baptist University

MLIIF US Dollar Global Bond Fund Excess Return* % % Monthly Excess Return YTD Excess Return Quarterly Excess Return Since Inception Excess Return Source: Internal; Datastream * Excess returns are calculated net of 1.15% management fee and after 0.75% rebate. Hong Kong Baptist University

Stable Fund Excess Return* % % Monthly Excess Return YTD Excess Return Quarterly Excess Return Since Inception Excess Return Source: Internal; Datastream * Excess returns are calculated net of 1.15% management fee and after 0.70% rebate. Hong Kong Baptist University

Asset Allocation

MLIIF US Dollar Global Bond Fund By Region, as at 31 December 2002 * SSB WGBI - 18 US $ Hdgd Source: Internal; Datastream Hong Kong Baptist University

MLIIF US Dollar Global Bond Fund By Region, as at 31 January 2003 * SSB WGBI - 18 US $ Hdgd Source: Internal; Datastream Hong Kong Baptist University

Stable Fund By Asset Class, as at 31 December 2002 * 70% SSB WGBI - 18 US $ Hdgd and 30% MSCI World (net) Source: Internal; Datastream Hong Kong Baptist University

Stable Fund By Asset Class, as at 31 January 2003 * 70% SSB WGBI - 18 US $ Hdgd and 30% MSCI World (net) Source: Internal; Datastream Hong Kong Baptist University

Stable Fund By Region, as at 31 December 2002 * 70% SSB WGBI - 18 US $ Hdgd and 30% MSCI World (net) Source: Internal; Datastream Hong Kong Baptist University

Stable Fund By Region, as at 31 January 2003 * 70% SSB WGBI - 18 US $ Hdgd and 30% MSCI World (net) Source: Internal; Datastream Hong Kong Baptist University

Stable Fund By Sector, as at 31 December 2002 * Allocation only includes the equity portion of Stable Fund. + MSCI World (net) Source: Internal; Datastream Hong Kong Baptist University

Stable Fund By Sector, as at 31 January 2003 * Allocation only includes the equity portion of Stable Fund. + MSCI World (net) Source: Internal; Datastream Hong Kong Baptist University

MLIIF US Dollar Global Bond Fund Performance Review MLIIF US Dollar Global Bond Fund

MLIIF US Dollar Global Bond Fund Q4 2002 The Fund outperformed the benchmark by 30 basis points over the 4th quarter of 2002 after net fees and rebate. The main detractor was the overall underweight duration position early in the period, during the continued bond market rally. Moving overweight duration in European bonds early in the 4th quarter benefited performance, as did our underweight in UK bonds as these underperformed. We remained underweight Japan most of the period, given low yields and concerns over the deteriorating fiscal position. In September we moved to neutral, expecting bonds to trade within a tight range for the rest of the period. Hong Kong Baptist University

MLIIF US Dollar Global Bond Fund January 2003 This slight outperformance was mostly due to our overweight duration position in European bonds. The positive contribution from European bonds was slightly offset by our underweight position in UK gilts, which detracted from performance. Hong Kong Baptist University

Performance Review Stable Fund

Stable Fund Q4 2002 The Fund underperformed the benchmark by 88 basis points over the period after fee and rebate. This was mainly because of our defensive stance (underweight equities, underweight bonds and overweight cash relative to the benchmark) through the 4th quarter during the selective rally which focused on IT and Telecom sectors. These sectors drove a rally which we believed was unsustainable on a valuation basis and we retained our cash weighting. Although this hurt overall performance during October and November, this strategy did add value during December and we believe the portfolio is positioned well for the 1st quarter of 2003. The underperformance of the fund due to asset allocations was partially offset by the outperformance of the equity portion in the second half of 2002. In consumer discretionary our choice of media shares benefited, particularly our holding in advertising services company Omnicom, which rose strongly from June’s lows as concerns over its accounting practices subsided and its business performance remained stronger than competitors. Our underweight US retail stocks impacted positively as these performed poorly on investor concerns over consumer spending growth.Our focus on high quality franchises at reasonable valuations in technology, such as Microsoft and Lexmark, was positive as underlying business performance improved. Hong Kong Baptist University

Stable Fund January 2003 The Fund slightly underperformed the benchmark during the month mainly due to the asset allocation to slightly overweight equities and underweight bonds. Equities fell in January and the valuation after middle of the month became attractive relative to bonds and we believe it was an opportunity to reduce the underweight position in equities. Meanwhile, we thought that government bonds were expensive unless there would be a global deflation. As we did not believe in global deflation, we adopted the underweight bonds strategies while the market was still paying high premium for safety. The outperformance of the fixed income securities’ picking was offset by the underperformance on the equities’ portion during January. The low quality stocks which were oversold in October were rebounded very strongly, such as, Alcatel in IT sector. We do not believe this sort of rally would be sustainable and should not be in your portfolio. Hong Kong Baptist University

Performance Review Major Markets Summary

Major Markets Summary Jan 3m to end 2002 2003 Dec 2002 % % % MSCI Hong Kong 0.6 1.8 -17.8 HSBC ( Reg) -3.7 6.2 -6.6 MSCI North America -2.2 8.6 -22.3 MSCI Europe -4.7 10.9 -18.4 MSCI Japan -4.0 -5.7 -10.1 MSCI Pacific free ex Japan & Hong Kong 1.6 4.8 -3.2 MSCI Emerging Markets Free -0.4 10.0 -6.0 SSBWGBI Hedged 0.5 1.3 8.0 Selected “small” markets in local currency terms Thailand (SET) 3.8 7.4 17.3 Indonesia (JCI) -8.6 1.3 8.4 Philippines (PHISX) 3.8 -9.8 -12.8 Korea (KOSPI) -5.7 -2.9 -9.5 Taiwan (weighted) 12.6 6.2 -19.8 Mexico (IPC) -2.8 7.0 -3.9 Brazil (BOVESPA) -2.9 30.7 -17.0 MSCI World -3.0 7.6 -19.9 Hang Seng -0.4 3.6 -15.7 S&P 500 -2.6 8.4 -22.1 MSCI Europe ex UK -3.3 12.3 -20.3 FT All Share (UK) -7.1 8.1 -14.5 TOPIX -3.6 -6.1 -8.9 HK Dollar to Japanese Yen 1.1 -2.5 -9.5 HK Dollar to Sterling -2.1 -2.3 -9.6 HK Dollar to Euro -2.3 -5.8 -15.2 HK Dollar to Aus Dollar -4.0 -3.5 -9.1 All indices in HK dollar terms except where indicated Hong Kong Baptist University

Current Investment Strategy and Market Outlook

Current Investment Policy Investment Summary ASSET CLASS STANCE COMMENT Equities Neutral Equity valuations have increased. Investor sentiment remains poor and structural headwinds may limit upside. Need to see clear signs of earnings recovery to justify valuations. Bonds Underweight Interest rate rises are not imminent given weak global economic prospects. Nevertheless with low yields at this stage of the economic cycle, we see limited upside going forward. Cash Overweight We are overweight cash as a capital preservation strategy. Hong Kong Baptist University 3 3 3

Current Investment Policy Global Overview: Economics update The risks to consensus forecasts for 2003 are now evenly balanced. Global growth expectations have fallen to more reasonable levels and recent forward looking data has been more encouraging. G7 consumer spending is expected to slow but the slack will be taken up by a modest recovery in investment spending. US economic growth will continue to exceed that in major countries, supported by a substantial fixed boost in second half of 2003. Hong Kong Baptist University

Fixed Income and Currency Outlook Global Bond Markets We view the current slowdown as a period of temporary softness in an ongoing economic recovery. Most recent economic indicators have been consistent with a period of slower growth rather than a return to global recession. Short term interest rates are unlikely to rise to any great extent in 2003. In any scenario other than outright deflation, government bonds appear expensive, with current yield levels driven by investors’ low risk tolerance rather than fundamental value. Hong Kong Baptist University

Fixed Income and Currency Outlook United States Fed policy to remain stimulative, even though rates are below levels that would typically be associated with the current economic environment. We do expect rates to remain close to current levels well into 2003. Credit will outperform government bonds as corporate slowly deleverage. Hong Kong Baptist University

Fixed Income and Currency Outlook Europe Mix of macro-economic policies (looser monetary policy but tighter fiscal policy in some countries is supportive for bonds). The European Central Bank is likely to cut rates again soon towards 2% as growth outlook is deteriorating. Notwithstanding fiscal slippage, Euro zone government bonds still offer the best value among the major markets. Hong Kong Baptist University

Fixed Income and Currency Outlook Currencies US Dollar still looks vulnerable on a 1-2 year horizon, given the combination of a rising current account gap and low yields. Euro continues to be hampered by structural concerns, even though on valuation grounds it has the greatest upside potential. We remain cautious on the Yen from a long term viewpoint due to structural problems in the Japanese economy. Hong Kong Baptist University

Equity Investment Outlook Following the sharp rally since the October lows, equity markets are likely to remain range bound, until the consensus view of weak economic recovery is challenged. Relative valuations still favour defensive sectors while technology in aggregate looks expensive. However the high level of macro liquidity is facilitating the “clean up” of balance sheet and cost restructuring policies should improve the quality of earnings going forward. Hong Kong Baptist University 3 3 3

Equity Investment Outlook United States We are modestly overweight in the US. Investment spending has stabilised after two years of aggressive cuts and we expect capital expenditure to take up some of the slack in the economy. Recent market rally have somewhat decreased the low valuation appeal in US equity markets as both prices and bond yields have risen. Hong Kong Baptist University 3 3 3

Equity Investment Outlook Europe We continue to prefer the UK over Continental Europe, due to valuation support and the defensive structure of equity markets. Europe’s economic performance remains lacklustre, reflecting a combination of structural headwinds (i.e. high business cost in core Europe) and hawkish monetary and fiscal policy. Earnings downgrades have accelerated, and consensus expectations have fallen. Hong Kong Baptist University 3 3 3

Equity Investment Outlook Japan The Japanese equity market remains our least favoured market among the major regions. The domestic outlook is still poor, as consumer spending is under ever increasing pressure from falling households incomes and declining employment. Economic growth was surprisingly strong last year largely driven by exports. Nevertheless momentum is beginning to wane. Hong Kong Baptist University 3 3 3

Conclusions We are underweight in equities and underweight bonds. Given market volatility in the near term, we adopt a cautious stance on markets. We are slightly overweight in the US, and favour the UK over Continental Europe. We remain significantly underweight Japan. Our underweight position in bonds remains given that valuations reflect the mixed economic outlook. In addition, yields remain low on an historical basis. Conservative Orientation Hong Kong Baptist University 3 3 3

Issued by Merrill Lynch Investment Managers, regulated by The FSA and a subsidiary of Merrill Lynch & Co., Inc. 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. 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 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. Unless otherwise specified, all information contained in this document is current as at 26th February 2003. This material is for distribution to Intermediate Customers (as defined by the FSA Rules).