Hsbc hoping to make onshore leap

HSBC\'s funds business, rebranded to signal its global market credentials, aims to beat adviser prejudice against bank ownership and the stigmas of offshore investing, writes James Smith.
HSBC Global Asset Management

HSBC Global Asset Management is the core global investment solutions and client-service platform of HSBC Holdings. In Britain it offers a range of Oeics and Luxembourg-based Sicavs with UK distributor status to intermediaries. At the end of June it had assets of $395 billion (GBP 256.5 billion) globally.

The funds business, now branded HSBC Global Asset Management, enjoyed a purple patch in the late 1990s and early 2000s, run by something of a salesman’s who’s who. Alan Gadd led as managing director, Robin Minter-Kemp was sales director, Richard Pursglove was in charge of discretionary sales and Andy Clark, the present director of wholesale, was head of IFA sales. This team, with Tim Russell on British equities and Chris Rice on European, had popular products to sell.

Clark says the break-up of this this team happened slowly, but the main split occurred in 2002, when Minter-Kemp moved to Cazenove and persuaded Russell and Rice to join him.

Jonathan Polin joined HSBC in 2003 to reignite the business, starting to focus on areas such as multi-manager. But recruitment to replace Russell and Rice, including Chris Rodgers and Jeff Currington, proved unsuccessful and Polin moved on at the end of 2004.

Fast-forward to 2005, when Clark and Mike Warren were at DWS, whose retail business Deutsche Bank was selling to Aberdeen Asset Management. HSBC’s then chief executive officer (CEO), Dean Buckley, asked the pair to come over and develop the group’s asset management operation in Britain. Warren subsequently left HSBC to join Thames River, leaving Clark as director of wholesale.

Clark says the rebranding of the British fund business in June was to signal that it is part of the global markets division rather than the retail bank. “Large banking groups have to make a strategic decision about fund management arms and while some decide to sell them off, HSBC has always been supportive,” he adds. “Our global asset management CEO, Mark McCombe, has been focusing on the UK and European side for the last couple of years and that has given us greater credibility in the wider business.”

Clark concedes that the variety of sub-boutiques within HSBC’s asset management division can be confusing and he has tended not to highlight them during his tenure.

There are four so-called global manufacturers of products – Halbis for active fund management, Sinopia on the quants side and the self-explanatory Multi-manager and Liquidity.

“I believe investors are not interested in which part of our business is running their money, but rather that HSBC is running it,” says Clark.

“There is long-standing suspicion towards us from UK advisers, who cite the usual performance arguments against groups with bank parents and are also wary that the bank has its own salesforce.

“Against this, surveys show most people are happy to invest with the HSBC brand. We have always been strong supporters of advice and are lining up consumer advertising that stresses people should consult their IFA.”

Clark says the brand should help the group to win market share during the present turmoil, but the key lies in compelling products. Multi-manager has been the focus of recent years, and HSBC launched its multi-asset Open range in 2006.

After a slow start, Open Global Return and Open Global Distribution have just under £200m between them and are among the best inflow stories of recent months, according to Clark. This is despite manager turnover on the vehicles – James Hughes, the original head, has relocated to Asia and his colleague Cara MacGregor also departed recently.

Last year HSBC added a third fund to the range, focusing on property.

“We launched the Open range in 2006 when long-only was booming and took criticism for bringing multi-asset vehicles to market,” says Clark. “These portfolios now form the core of our external range and we are delighted with performance.”

Across the rest of the Oeic range, performance is patchy, although Clark points to decent numbers on the Corporate Bond and Gilt & Fixed Interest funds. Both are upper second quartile over one and three years, according to Trustnet data.

Elsewhere, Open Global Return is the group’s only top-quartile product over 12 months, while Japan Index is the only one over three years.

When Clark and Warren joined in 2006, one of their priorities was to address the albatross of UK Growth & Income, which had struggled since Tim Russell’s departure. They opted to switch the vehicle, plus two other UK funds, to a multi-manager approach using a blend of investment styles. On UK Growth & Income, Edinburgh Partners, GMO and Mirabaud run the assets, on opportunities, core and high alpha mandates respectively.

Clark says that after a poor start the fund has crept into the second quartile over a year and investors should reserve judgment until the strategy hits a three-year track record in 2010. He is confident that the shift to multi-manager shows the group will outsource where necessary, with, for example, New York-based Davis Advisers also running the American Growth fund.

Ben Yearsley, investment manager at Hargreaves Lansdown, says that HSBC is a tough group to judge because most of its best products are in non-core areas. American Growth is the only HSBC fund on Hargreaves’ Wealth 150 list of preferred funds.

“HSBC does have interesting products, but many are offshore and most are focused on Asia and emerging markets,” says Yearsley. “The India offering, under Sanjiv Duggal, and Bric [Brazil, Russia, India and China] fund are strong, but the issue lies in UK equities. The group does not have great performance to offer in this area and UK Growth & Income is struggling under its multi-manager approach.”

Tim Cockerill, the head of research at Rowan Capital Management, is another buyer troubled by HSBC’s lack of core British equity products. “We followed UK Income & Growth for a while under Bob Morris after Russell left, but the numbers never stacked up,” he says. “The group also launched higher alpha UK offerings a few years ago, like UK Freestyle, but performance has been average.

“We were interested in American Growth when Davis took over but several houses have made claims about finding top local groups to run US money and few have succeeded.” American Growth is third quartile over one and three years, with Davis in charge since 2005.

Cockerill also highlights the tracker range, in particular Japan Index. “We used to notice the FTSE 250 Index fund, which seemed to outperform active mid-cap managers when that part of the market was doing well,” he says.

For the future, Clark’s main focus is on the offshore side and the group is about to announce a tie-up with a fund supermarket to offer its 55-strong Sicav range. He says this range is an effective showcase for HSBC at its global best, with emerging market, single country and several absolute return funds, plus a Mena (Middle East & North Africa) launch imminent.

“It has long been a frustration that we have this range but could not get it to UK investors,” says Clark. “Supermarkets are now listing offshore funds, and with this growing access I can see a situation where Sicavs could become more popular than Oeics in a few years. This trend will also bring new groups into the UK and change the landscape. We want to be at the forefront of that.”

However, Clark admits this will not happen overnight and that education is necessary to remove stigmas attached to offshore investing. “Tax has always been a key issue, but if you are buying a corporate bond fund, for example, you would be better off with a Sicav,” he says.

Despite the offshore focus, Clark insists that the Oeics are not seen as a dead range and has been working to freshen up various offerings. HSBC moved the European Growth fund to a 25 by 4% (25 stocks equally weighted at 4%) mandate, for example, in a bid to stimulate performance. The vehicle was a top performer under Chris Rice but has struggled in recent years. Under the change, the number of holdings drops from about 40 to 25, giving Nick Dowell, the fund manager, a hurdle before buying stocks.

Also imminent is a revamp of the Greater China fund to a pure China portfolio, managed by Richard Wong. Wong runs the group’s $3.6 billion (GBP 2.3 billion) Chinese Equity Sicav, which the group claims is the world’s largest actively managed equity fund investing in that country. Greater China invests across China, Hong Kong and Taiwan and the group says investors want cleaner exposure to China.

If the Sicav roll-out goes well, the Oeics could potentially merge into them. “It will be about providing access to our best funds and making them as easy to buy as possible,” says Clark.

“Groups are launching funds as Sicavs and there is growing focus on product rather than domicile. There are fears about bringing more funds to an overcrowded market but we see wider access to offshore funds as a major positive. There is no point pretending all the best vehicles are run out of London any more.”

The best and worst funds for each group profiled in the Focus are shown on a relative rather than absolute basis. Until recently, the best and worst funds were defined in absolute terms. But the percentile ranking of a group’s funds are now shown relative to their respective sectors.