Report for 2Q 2004 Hong Kong Baptist University 1998 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

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

Performance Summary

Hong Kong Baptist University 6 Performance Summary 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 % 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.

Hong Kong Baptist University 7 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 FundBenchmark Since inceptionYTD2Q 04Since inceptionYTD2Q 04

Hong Kong Baptist University 8 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 YTD July 2Q 04 YTD July 2Q 04

Hong Kong Baptist University 9 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 years 1 year Since Inception 2 years

Asset Allocation

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

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

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

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

Performance Review MLIIF US Dollar Global Bond Fund

Hong Kong Baptist University 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

Performance Review Stable Fund

Hong Kong Baptist University 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.

Performance Review Major Markets Summary

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

Investment Outlook

Hong Kong Baptist University 22 Global real short rates remain close to zero Source: Datastream G3 Real Short Rates %

Hong Kong Baptist University 23 Tailwinds will fade during H 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 Source: Datastream % Loans, Y/YM2 Money Supply, Y/Y

Hong Kong Baptist University 26 Earnings cycle is maturing World real EPS Source: MSCI, MLIM

Hong Kong Baptist University 27 Global earnings momentum is peaking Source: IBES Lead Economic IndicatorRate of Upgrade, % FY1 EPS Global Earnings Revisions

Hong Kong Baptist University 28 Source: MLIM World P/NE Global equity valuations back at top of pre-bubble range

Hong Kong Baptist University 29 US valuation gap with Europe has widened EuropeUS Source: MLIM P/NE

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

Hong Kong Baptist University 31 Growth styles becoming more attractive Source: Citigroup, MLIM Ratio of dividend yield - growth vs value Ratio % DY+2 SDMean-2 SD Expensive Cheaper

Hong Kong Baptist University 32 Value is appearing in short duration bonds Source: MLIM Eurozone 2-year yield deviation from fair value /9301/9501/9701/9901/0101/0301/05 No. of Standard Deviations

Hong Kong Baptist University 33 Value is appearing in short duration bonds Source: MLIM US 2-year yield deviation from fair value /9301/9501/9701/9901/0101/0301/05 No. of Standard Deviations

Hong Kong Baptist University 34 Investment grade credit offers little value Source: Bloomberg

Hong Kong Baptist University 35 Still some value in high yield High Yield spread over Treasuries /01/8230/04/8331/07/8431/10/8531/01/8730/04/8831/07/8931/10/9031/01/9230/04/9331/07/9431/10/9531/01/9730/04/9831/07/9931/10/0031/01/0230/04/03 ML High Yield 175 Index YTM spread over 5-year Treasury benchmark % 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