HSBC Investments aims to boost momentum and improve a “”middling”” performance by its retail funds by outsourcing to third-party managers. Adam Lewis finds out how it is succeeding.
Given its size, if HSBC Investments were a ship it would be an oil tanker, according to Andy Clark, managing director of wholesale. Mechanics dictate it takes a fair amount of time to turn round such a large vessel and Clark notes the same principle can be applied to the fortunes of the group.
Across the globe HSBC Investments presides over $360 billion (£176 billion). Of this, £6.5 billion is in 32 British retail funds that the group runs and $30 billion is in its range of globally managed Luxembourg Sicav funds.
According to Morningstar, of the 32 British retail funds, 28 have a one-year track record and 21 have been managed for three years or longer. Clark concedes that the past performance of these funds is middling.
Over one year to December 10, 14 of the 28 are ranked either first or second quartile in their peer groups, while over three years only five of the 21 funds are ranked in the top half of their sectors.
Clark says: “Right now we are in the mid-zone. Performance over three years is below where it should be, but we have taken a number of steps to address this and the benefits of this are starting to coming through now.”
The changes Clark refers to are the group’s decisions to outsource the management of several funds to third-party managers. First, in April 2005 it outsourced the running of its American Growth fund to Davis Advisors, an American money-management company. In November 2006 the group handed over the running of its Monthly Income fund and UK Smaller Companies funds to Sinopia, HSBC’s Paris-based quantitative division.
Finally, in November 2006, following poor performance, it outsourced the management of the UK Growth & Income and Income funds, which together are worth a combined £1.5 billion, to third-party managers. Three firms manage Growth & Income: Edinburgh Partners, Mirabaud and GMO. GMO, Edinburgh Partners and Walker Crips run the Income portfolio.
Clark says: “Growth & Income recently crept into the second quartile of the UK All Companies sector, having been fourth quartile this time last year.
“So, quietly, we are beginning to see the green shoots of recovery. The fund is now slightly more aggressively managed and we are pleased with how the first year has gone. There will be more ebbs and flows, but both the Growth & Income and Income funds are heading the right way.”
Darius McDermott, managing director of Chelsea Financial Services, says that, for a group of its size, HSBC’s decision not to manage a number of core funds in-house was an “interesting choice”. Indeed, though he admits he has not looked at the fund’s most recent performance, McDermott says the benefits of the move to outsourcing have yet to be fully proven.
According to Morningstar, UK Growth & Income is ranked third quartile over the past 12 months, returning 4.91% to investors.
However, this is marginally higher than the UK All Companies sector average return of 4.56%. Before the outsourcing deal the fund was run by Bob Morris within Halbis, HSBC’s high-alpha investment arm, set up at the end of 2004. Morris took over the fund after Tim Russell left the group to join Cazenove.
Clark says that half of the funds in its retail range are now outsourced to third parties and the remainder is managed by Halbis.
Among the funds still run by Halbis is European Growth, managed by Angus Parker, which is ranked only third quartile over one year and fourth quartile over three years.
“We have been having a number of conversations with Halbis regarding the underperformance,” says Clark. “We will shortly be announcing changes to the fund that will be positive for it. At present it’s managed in a very ‘steady Eddy’ manner and we consider this style to be out of date.
“We need to allow the fund managers to outperform, so we are taking action to change it, but it is unlikely this will involve outsourcing the management.”
McDermott says while Chelsea has no HSBC funds on any of its buy lists at present, this is likely to change soon. While he is paying close attention to American Growth, the first fund that Chelsea will add is the Open Global Return fund.
Open Global Return, launched in November 2006, was one of two funds initially launched in HSBC’s OpenFunds range. Despite managing multi-manager assets for about 10 years, the Open Global Return and Open Global Distribution funds were the group’s first retail market offerings. A third, Open Global Property, was launched three weeks ago and assets under management in the three portfolios are now £50m.
Clark says: “The £15m seed money that went into the first two funds has now been bled out, so the £50m is all client money.
“In the first few months, when we had only taken in £5m, we took some criticism. However, we are delighted to have taken in £50m after just one year and by the end of next year we are hopeful of raising it to £300m. My name is stamped all over these funds so I need it to work.”
McDermott says OpenFunds was HSBC’s main area of focus in 2007. He has seen the management team, headed by James Hughes, several times already.
“Funds of multi-asset classes is a concept we are keen on,” he says. “By holding a mix of non-correlated assets the funds can provide a steady return over a market cycle. As such they would make good core holdings in pensions and other client wrappers and they are funds very much on our radar screen.”
However, Clark stresses that that the group does not want to be known just for its OpenFunds. Apart from the changes on some of the onshore retail funds, Clark is keen to promote several of HSBC’s Luxembourg Sicav funds.
“The days of being an everything-to-all fund management group are long gone,” he says. “We are strong in emerging markets through our Sicav range, having the largest Brazil, China and India funds in the world. Next year there is no reason why these Sicavs can’t be bigger in the UK as they carry UK distributor status and are being bought by fund of funds managers and large discretionary stockbrokers.”
Last month HSBC added a Climate Change fund to its Luxembourg Sicav. Managed by Sinopia, the fund holds 60 companies taken from the firm’s Global Climate Change Index, which itself was launched last month and contains 300 stocks.
“What we are working to achieve now is getting these Sicavs on the fund platforms so as to bring them to the mainstream UK retail investors,” says Clark.
“Given the fact that our Sicavs carry distributor status, it now seems ridiculous to bring out onshore versions of existing funds. I predict that 2008 and 2009 will see a real emergence of Sicavs in the UK.”
In terms of its perception among advisers, Clark says HSBC research is showing a rise in funds usage. However, this does not seem to be the case with fund of fund managers.
Bambos Hambi, head of multi-manager at Gartmore, says he has not spent much time looking at HSBC, while Alan Stokes, head of multi-manager funds at Lawrence House, says it is a group he knows little about any more.
Stokes adds: “The group has something of a chequered history in terms of its funds. There have been a number of occasions we have looked at them, but in the final analysis they have never made our final screen. They do have a lot of expertise in Latin America and we did look at the [offshore] Bric Freestyle fund, but it was a little too racy for our portfolios.”
Despite this lack of interest from some fund of funds managers, Clark is confident the group is pushing ahead in the right direction. “We are trying to build relationships and trust, and trust is all about being consistent, not just selling hot products.
“It takes time to turn around an oil tanker but we think we have now fixed the gears and have serious momentum.”
HSBC Investments – is the core global investment solutions and client-service platform of HSBC Holdings and manages £6.5 billion in its ranges of Oeics. HSBC Holdings serves more than 125m customers worldwide through about 10,000 offices in 83 countries.