Investment and Funds Management Activities

Investment Policy and Guidelines

In pursuing its goals and objectives, the Company is able to invest and utilise its resources from the Long Term Fund, the Development Fund and the General Fund in accordance with the Program Rules of the Company. The Rules require that investments in the Long term Fund be placed in 'low-risk' investments.

The objectives of the Company's investments are to:

• significantly build up the Long Term Fund through interest rate earnings dividends, capital gains and foreign exchange gains;
• diversify its investment portfolio against interest rate, foreign exchange and other financial markets risks;
• invest portions of the Long Term Fund in Papua New Guinea in low-risk strategic investments. These may be in investment projects that generate significant sustainable economic and development benefits for Papua New Guinea and its people.

The Board has established an Investment and Finance Committee to oversee its Investment Policy and Guidelines under which the Company's investments are to be managed.

International Funds Management Operations

Newton Investment Management Ltd (NIM) continued to receive and manage the Company's funds during the period. As at 31 December 2004, the Funds Balance managed by Newton amounted to US$109.2 million (K352.2 million), consisting of Short Term Fund Portfolio investments valued at (including interest) US$19.7 million (K63.5 million) and Long Term Fund Portfolio investments valued at (including earnings) US$89.5 million (K288.7 million). The Long Term Fund Portfolio consisted of fixed interest investments of US$80.1 million (K258.4 million) and equity investments of US$9.4 million (K30.3 million).

The Board also appointed Schroders in November 2004 as the second Investment Adviser/Funds Manager to mitigate risk and encourage high levels of performance in its investments. No funds of the Company were transferred to Schroders during the period.

PNG Funds Management Operations

The Company also decided to undertake certain investments in Papua New Guinea's financial markets, especially from its Development Funds. The amount of funds invested will increase as more projects are approved for funding under the Development Fund.

Investment operations were undertaken in Papua New Guinea totalling US$7.14 million (K23.03 million). The Papua New Guinea investment portfolio comprised Inscribed Stock of US$4 million (K12.9 million), Treasury Bills of US$1.2 million (K3.87 million), PNG Microfinance of US$1.9 million (K6.13 million), and equity shares in New Britain Oil Palm of US$0.04 million (K0.132 million). The Company entered into a five-year SWAP arrangement with the Bank of South Pacific providing US$5million in exchange for K16.3 million, which was then invested into PNG Government Treasury Bills and Inscribed Stock.

Returns on Funds Managed

During 2004, the weighted average rate of return on the Company's investment portfolios was 2.14 per cent for the Long Term Fund and 1.32 percent for the Development Fund. The low returns on the Long Term Fund were attributed largely to low interest in the short term Fixed Investment Market at a time when long-run trends were thought to be excessively risky. The lower return on investments of the Development Fund was attributed to the Company's initial equity investments in PNG Microfinance Ltd and PNG Sustainable Energy Ltd.

Papua New Guinea Investment Opportunities

The Company evaluated several opportunities in PNG based companies for possible equity investment from its Long Term Fund, should these meet the "low-risk investments" criteria. In addition to potential dividend income from these investments, the Company saw strategic opportunities from the operations of these companies in expanding village and smallholder income and employment opportunities on a sustainable basis.