Big player comes out of the shadows

30 November 2009 | By Tomas Hirst

HSBC Global Asset Management is the core global investment solutions provider of HSBC, one of the world’s largest financial services organisations. As at September 30, 2009 the firm had $416 billion (£250 billion) in assets under management.

A quick glance at the performance of HSBC Global Asset Management’s fund range reveals an interesting picture.

Of the 27 onshore funds with a three-year track record only two sit in the first quartile while 19 are in the bottom two quartiles.

The modest performance of the range meant that the group dropped off the radar of many British-based advisers.

“To be honest, we’ve not really had a lot of contact with them over the past few years and we don’t use any of their funds,” says Jonathan Wallis, the director of research at Allenbridge.

“If nothing really stands out, unless a group’s in regular contact with us we’re not going to chase them. Looking at the performance it’s been okay but nothing to shout about.”

Over the past 12 months, however, 16 of those same 27 funds sit in the top two quartiles, suggesting that progress is being made.

Click here to view HSBC Global Asset Management’s Fund Returns over one and three years

“I think this year was the year that we have come of age,” says Andy Clark, a managing director at HSBC Global Asset Management.

Clark says two strategic areas that HSBC was already heavily involved in came to the fore over 2009 ,which has benefited the group. “Risk came back on the table as inves­tors went back into emerging markets, where we have a large footprint,” he says. “We saw heavy inflows into our Brazil fund, our India fund and our China fund, which was obviously very good news. The India fund and the Brazil fund are the biggest in the world, so it’s a fantastic story.”

”HSBC is a major bank that has come through the crisis relatively well but they just don’t seem to be capitalising”

All three of the funds are offshore Sicav products. In sterling terms the Brazil Equity fund has been the top performer, returning 170.68% over 12 months against a return of 131.88% from the MSCI Brazil index. The China Equity and Indian Equity funds have been equally impressive returning 76.84% and 140.16% respectively.

The problem for many British-based advisers and fund of funds managers is that the onshore universe is so large that offshore funds have a hard time getting themselves noticed.

Michael Clarkson, manager of Brown Shipley’s Growth and International funds of funds, says: “We’ve had a couple of sales contacts [with HSBC] but none of their funds have come up on our radar. There’s been a lot of regulation in recent years designed to make it easier to invest in offshore vehicles but there are still a lot of hurdles.”

 

Clark says that with the advent of Ucits IV, access to offshore Sicav funds should become easier and choices for investors will broaden. This, he says, could make the job of advisers increasingly difficult as their investment ­universe expands so that part­nerships between IFAs and multi-managers, for example, will grow in importance.

HSBC’s second key play was to increase the competitiveness of its passive tracker funds by dropping fees at a time when other groups, such as Fidelity and L&G, were increasing the total expense ratio (TER) on their offerings.

“We made a strategic move with our index pricing in the middle of the year, bringing down our management charges by 25 basis points,” says Clark. “This has been taken very well and we have seen increased inflows, particularly from IFAs who have got their eyes on RDR [Retail Distribution Review] new model of advising.”

Proof of the success of these strategies came as the group was ranked in the top 10 asset management firms in terms of retail inflows over the past two quarters - the first time for about a decade that HSBC Global Asset Management has been in this position, Clark says.

While it looks as though for the industry as a whole 2009 will be a record year for inflows after a disastrous 2008, things appear to be settling down. Clark says the problem is a divergence of opinion not simply over the shape of the recovery but also over the speed of the rally that is likely to mean more modest levels of inflows into the new year.

“Bizarrely, this year there have been contradictory views all year and yet the market has steamed on,” he says. “I think people have become more reflective now in terms of investing and I suspect the rapid growth we’ve seen in inflows will slow as people ponder how much further these markets have to go.”

The core theme that HSBC plans to tap into is the paradigm shift from West to East in the search for growth. This month the Organisation for Economic Cooperation and Development more than doubled its estimate for economic growth in its 30 member countries next year - from 0.7% to 1.9%. In contrast, China is forecast to grow by 10.2% in 2010.

 

“As always we’ll see ebbs and flows of performance but in terms of this long-term story emerging markets should be in a client’s portfolio,” says Clark. “I think core holding is probably too far but it certainly should be a part of younger ­people’s portfolios, as it’s becoming less exotic and more mainstream.”

Despite Clark’s confidence, some advisers remain uncertain about HSBC’s core offerings. Tim Cockerill, the head of research at Rowan, says the group’s focus on passive tracker funds and emerging markets could isolate it from the mainstream IFA market in Britain.

“I know they have some passive tracker funds and esoteric single-country funds which might be picking up support, but it’s not what our clients are looking to us for,” he says. “HSBC is a major bank that has come through the crisis relatively well but they just don’t seem to be ­capitalising.”

While historically the performance of some funds in what might be considered core markets has been disappointing, Clark says HSBC has worked to change this perception in recent years.

“Back in 2006 our core UK funds with a track record of four or five years were definitely fourth quartile, which wasn’t good enough and was not what we would expect,” he says. “We took them away from Halbis, our active manager, and gave them to our multi-manager team and they’re now manager of managers. The performance of those over the last two years has been pushing into the second quartile, which given the erratic performance beforehand is a good effort.”

Having 276 funds with a three-year track record in the Investment Management Association UK All Companies sector, HSBC will face competition. If the funds can muscle into the top quartile, this could force them on to the radar of the more traditional IFAs. It will also symbolise a remarkable turnaround in the funds themselves.

“We’ve always said we needed three years-plus to prove that it works and we’re getting up to that point next year,” says Clark. “The one thing that I would like to do with HSBC Global Asset Management is move into the UK equity space. It’s very competitive but I believe we have the skills to do it, so we need to prove we can.”

As Cockerill suggests, the success of this enterprise could become a key test for the group.