Trustee Investment Powers and Responsibilities in Hong Kong

The Trustee's Investment Mandate

One of the most important functions of a trustee is the investment of trust assets. The way in which a trustee invests determines the financial outcome for beneficiaries over the life of the trust. Trustees who invest poorly — whether through excessive caution, excessive risk-taking, or simply failing to exercise the required standard of care — may be personally liable to beneficiaries for losses.

Hong Kong's framework for trustee investment is principally governed by the Trustee Ordinance (Cap. 29) and the terms of the individual trust deed. Understanding this framework is essential for any trustee, professional or otherwise, managing investment assets on behalf of beneficiaries.

Statutory Investment Powers Under the Trustee Ordinance

The Trustee Ordinance confers on trustees a range of statutory investment powers where the trust deed does not restrict or expand upon them. The general power of investment under the Ordinance allows a trustee to make any kind of investment that it could make if it were absolutely entitled to the trust assets.

This is a broad statutory power that permits trustees to invest in equities, bonds, real estate, collective investment schemes, alternative assets, and other instruments. However, this broad power is qualified by the statutory duty of care: the trustee must exercise such care and skill as is reasonable in the circumstances, having regard to any special knowledge or experience that the trustee has or holds themselves out as having.

Professional trustees — including trust companies, banks, and qualified solicitors acting as trustees — are held to a higher standard than lay trustees, as their professional background implies a higher level of skill and knowledge in investment matters.

The Prudent Investor Standard

The Hong Kong courts apply a prudent investor standard to trustee investment decisions. A trustee must invest as a prudent person of business would invest if they had an obligation to the beneficiaries. This standard requires:

Diversification: A prudent investor spreads investment risk across different asset classes, geographies, and sectors. Concentrating the trust portfolio in a single asset or a single sector is generally imprudent unless there are specific reasons justifying the concentration.

Regard to beneficiaries' interests: The trustee must balance the interests of income beneficiaries (who benefit from current yield) and capital beneficiaries (who benefit from capital growth), and must not sacrifice one class of beneficiaries' interests for another without justification.

Liquidity management: The trustee must ensure that sufficient liquidity is maintained to meet the trust's foreseeable distribution needs and expenses.

Risk management: The trustee must assess and manage investment risk, including reviewing the trust portfolio periodically and taking appropriate action to rebalance or adjust investments in response to changing market conditions and beneficiary needs.

Investment Policy Statement

Best practice for professional trustees is to prepare and maintain an investment policy statement (IPS) for the trust. An IPS sets out the trust's investment objectives, time horizon, risk tolerance, asset allocation targets, permitted asset classes, and performance benchmarks. It provides a framework for consistent decision-making and accountability, and helps demonstrate compliance with the trustee's fiduciary duties if investment decisions are later challenged.

Delegation of Investment Functions

The Trustee Ordinance permits trustees to delegate investment functions to an agent, provided the delegation is in writing and the trustee provides the agent with a written policy statement guiding the agent's exercise of discretion. The trustee remains responsible for selecting an appropriate agent, reviewing the agent's performance, and intervening if the agent's decisions are inconsistent with the trust's investment policy.

In practice, professional trustees frequently delegate day-to-day portfolio management to investment managers, while retaining oversight through an investment committee or periodic performance reviews.

Liability for Investment Losses

A trustee who makes investment decisions in breach of their duties may be personally liable to compensate beneficiaries for any loss suffered. The trustee will not generally be liable for investment losses that arise despite prudent decision-making in accordance with the required standard of care. An honest trustee who makes a reasonable but ultimately unsuccessful investment decision should be protected from liability, provided the decision was properly reasoned and documented.

Trust deeds may include exculpatory clauses limiting the trustee's liability for investment losses, but courts have held that exculpatory clauses cannot relieve a trustee of liability for wilful default or gross negligence.

How Alan Wong LLP Can Help

Alan Wong LLP advises trustees on their investment duties and responsibilities, including drafting and reviewing investment policy statements, advising on the scope of investment powers under specific trust deeds, reviewing investment delegation arrangements, and assisting with trustee liability issues. We work with individual and institutional trustees to ensure that their investment activities comply with both the trust instrument and Hong Kong law. Contact us to discuss your trustee investment obligations.