Tighter image keeps giant at top

Fund Strategy - 6 Aug 2012 | By James Smith

Passive inflows have been key to HSBC cementing a place among the industry’s top net and gross fund sellers. Despite its size, the group has ebbed and flowed in the UK retail market and managing director of the UK and EMEA wholesale business Andy Clark says its top 10 position surprises many.

According to Clark, this success has come from three areas: passive - across trackers and exchange traded funds - multi-asset aand emerging markets. “A mistake we made in the past was trying to be all things to all people and we are focusing on areas where we can add genuine value, such as passives and emerging markets,” he adds.

This pragmatic approach is the culmination of a long-term repositioning of HSBC in the retail space - and the business is unrecognisable from a decade ago. Until recent years, the group - now branded HSBC Global Asset Management - enjoyed its best period in the late 1990s and early 2000s.

With Alan Gadd as managing director, Robin Minter-Kemp as sales director, Richard Pursglove in charge of discretionary sales and Clark himself heading IFA sales, the group also had popular funds to sell. Tim Russell’s UK Growth & Income was particularly favoured by multi-managers and advisers, as was European Growth under Chris Rice. This came to an end in 2002 when Minter-Kemp moved to Cazenove and took five managers - including Russell and Rice - with him. Jonathan Polin joined in 2003 to reinvigorate the business but replacements for stars proved unsuccessful and he moved on at the end of 2004.

Since his initial tenure, Clark had moved to Fidelity and then DWS, eventually rejoining HSBC in 2005 to head up UK wholesale and develop the asset management business.

Overall, HSBC believes passives could double in the next five years and inflows into its funds are already surpassing this. UK Gilt Index and American Index have doubled in the past 12 months and the latter’s top-quartile performance over one and three years highlights passive benefits in efficient markets such as the US.

Alongside traditional trackers, HSBC also entered the ETF space in 2009, seeing a viable market for both passive structures. With controversy over synthetic ETFs in recent months, the group has always been a staunch advocate of physically replicating products, even getting these away on difficult markets such as Russia.

“Our stance has always been to remain as clear as possible for end clients so we have kept to what some might see as a more conservative physical replication route,” says Clark.

“Synthetic products are more difficult to understand and while there is nothing wrong with the majority, we will continue down the physical path for the sake of transparency.”

Clark says inflows on the passive side are encouraging and show that what the group expected is already happening in terms of investor behaviour, even pre-RDR.

Passive also forms the cornerstone of HSBC’s foray into low-cost ‘RDR-friendly products, while peers including Schroders and JPM have kept faith with their active roots.

Last October, the group launched its three-strong World Index range - ­Cautious, Balanced and Dynamic - investing across equities, bonds, cash and alternatives for a 0.5 per cent annual charge.

“There has been some confusion surrounding these low-cost offerings between active and passive so far and that has hindered take-up,” Clark adds. Clark says HSBC has always embraced the concept of RDR but he has some concerns about how supermarkets will fit into the picture.

“RDR is that it has to be done properly, splitting out the manufacturing and distribution parts of fund pricing,” he adds.

“We will have clean share classes but this leads to the situation where our funds will be available at different prices on different supermarkets. The priority has to be transparency and if any part of the supply chain is compromised, that could tarnish the whole RDR.

“Our price model will be clean and transparent, which might eventually mean will cannot deal with certain supermarkets.”

Apart from the shift towards passive, RDR changes are also driving advisers to multi-manager and multi-asset as many look to outsource investment. HSBC launched its multi-asset Open range in 2006 and the funds, under Jon Rebak, now have over £600m under management.

Open Global Distribution is among the group’s top-quartile performers over three years, ranking 29th out of 124 peers in the IMA Mixed Investment 20-60% Shares sector. Asia and emerging markets form the third leg of HSBC’s retail push and with $140bn invested across this space (of $430 total assets), it is among the world’s largest emerging market managers. Key GEM funds include the £2bn-plus India Equity, Brazil Equity and Bric Equity.

“Our India and Brazil funds are the biggest in the world and tend to move up and down with what remain fairly volatile markets,” adds Clark.
“India Equity had a tough 2011 for example but has improved substantially this year.” Sanjiv Duggal’s fund is fourth quartile over one and three years but this is in the broad emerging markets sector.
“As a group, we are focused on telling clients what our products are designed to do and delivering the required outcomes,” says Clark.”Too much attention on quartile ranks plays into the hands of those obsessed with short-term performance and many clients will have their own benchmarks rather than using broad IMA sectors.”

Elsewhere, Clark also highlights growing inflows into emerging market debt, where HSBC boasts a long track record in contrast to many groups entering this space now. Its EMD assets passed $10bn and the figure rises to nearer $70bn if Latin American and Asian debt is included.

With most of its emerging market products offshore, increasing access to the group’s Sicav has long been among Clark’s priorities. While progress on supermarkets listing offshore funds has been slow, he says things continue to move forward.

”A mistake we made in the past was trying to be all things to all people and we are focusing on areas where we can add genuine value, such as passives and emerging markets”

“More advisers are looking offshore and those that want to remain independent post-RDR will need to consider as broad a range of products as possible,” he adds.

Despite offshore strength, HSBC has always insisted its Oeics are not a dead range - although few are actively pushed beyond the Open products. One to keep an eye on is UK Focus, which is top quartile in the IMA UK All Companies sector over three years.

This fund has been a discretionary offering in the past but manager Alec Letchfield - the chief investment officer on HSBC Wealth - is winning a wider audience with his focused stockpicking.

Among fund buyers, Adrian Lowcock, a senior investment adviser at Bestinvest, acknowledges HSBC is more focused on passives and says it can add value for investors in this areas. “Charges on its tracker funds are very competitive and often cheaper than ETFs covering the same area,” he adds.

Elsewhere in the range, Lowcock was initially impressed by Nick Dowell’s turnaround on the European Growth fund since taking it over and moving to a 25 by 4 per cent approach in 2007.

Performance has dropped off over the past 12 months however, with bad news at stock and macro level across the continent.

“Political decisions are driving markets rather than fundamentals in Europe,” adds Lowcock.

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