The whole world in your hands. Why invest in the HSBC FTSE All-World Index Fund. For professional clients only

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1 The whole world in your hands Why invest in the HSBC FTSE All-World Index Fund For professional clients only

2 There is an established belief among many invesrs that an equities portfolio can benefit from being diversified across different global markets. This worked well in the past, when large companies focused their activities predominantly on domestic markets. However, markets are becoming increasingly interconnected, with new opportunities for global businesses diversify its sources of revenue across the globe. So why should invesrs use a global fund for their equities exposure? And if they do, how go about selecting the right global equity index?

3 Why go global? At a time when local economies had their own monetary policies, taxation regimes and regulation, markets differed more in the way they reacted global events. If Spanish or Italian companies suffered from, say, falling consumer demand, invesrs could in theory find some markets that were relatively immune that. However, as European economies integrated and adopted the single currency, and globalisation made itself felt across the globe, things have gradually changed. In day s global economy, many large companies have impressive international geographic footprint spanning many markets, currencies and jurisdictions. Deregulation, newly opened economies, simplified taxation rules and advanced banking services have all made it easier for companies do business abroad. Many have diversified their revenues so effectively that, in spite of where they are listed, they are influenced by market trends in a similar way their peers in other parts of the world. While geographical diversification is still a useful ol, it is becoming more difficult for the average invesr construct an effectively diversified equity portfolio without specialist advice. Recent research 1 showed that major global markets are now more correlated than they have been over the past 120 years (please see the chart below). More of the same: global equity markets are more correlated 2 than ever First World War Second World War Source: A Century of Global Equity Market Correlations by Dennis P. Quinn and Hans-Joachim Voth, American Economic Review: Papers & Proceedings Shaded areas indicate observations reflecting sck returns affected by the two world wars. 1 A Century of Global Equity Market Correlations by Dennis P. Quinn and Hans-Joachim Voth, American Economic Review: Papers & Proceedings Correlation measures the movement of one investment in relation another. Perfect correlation, signified as 1, implies that both investments move in lockstep.

4 Emerging markets change behaviour In turn, this has led an increasing trend of sck prices moving in tandem. This has limited the diversification benefits of spreading your investment portfolio across different geographies and types of markets. There is also evidence that far from de-coupling from the developed world, emerging markets have become increasingly correlated with US and European benchmarks over the past couple of decades. For instance, correlation between Asian markets and the S&P 500 Index has risen from about zero in in Asset class selection is (almost) everything 94% Asset Class Selection Market Timing Asset Selection This is having serious consequences for equity invesrs asset allocations decisions. It means that they can no longer rely on emerging markets behave differently their developed world peers. The change has been borne by a number of facrs, among them financial liberalisation developments that have eased the flow of capital, including capital market reforms and the establishment of country funds 4. Subsequently, emerging markets now provide less of a diversifier of returns than they have in the past. Taking a global approach Apart from the difficulties around diversification, there are other reasons for opting for a global approach. Some of them relate passive funds relative advantages when compared active funds. Asset allocation drives returns. In an era of low inflation, low interest rates, low economic growth and lower returns, the right investment decision at an asset allocation level is the main source of returns. In their well-publicised study 5, Brinson and Beebower concluded that market timing and individual asset selection accounted for only 6% of the variation in returns, with strategy or asset class making up the balance. Based on this argument, invesrs could get 94% of any potential return in equities by investing in a global equities tracker fund. 4% 2% Cost efficiency. One of them is the nervousness which some invesrs feel about choosing active equity funds. Over the past few years, invesrs have been looking for cost-efficient ways get exposure equity markets as many active funds failed produce strong outperformance as market volatility fell. Passive funds investing in global equities are cost efficient and offer market exposure without the resources, time and commitment required actively run a diversified global equity portfolio. Composition rules We believe that investing in global equity markets provides diversification benefits. There are several global equity indices that offer a broad and balanced exposure across many geographies and secrs. In contrast, by using regional indices, invesrs get exposed different risks from the secr perspective. For example, according FTSE, while financial companies accounted for about 20% of the North American, Japanese and Developed Europe equity markets, their share in Emerging Europe was 30% and almost 33% in Asia Pacific ex Japan. An interesting contrast is presented by healthcare, which is around 10% of North American and Developed Europe equity markets but comprises less than 1% of Emerging Europe and Latin America and only 2.25% of Asia Pacific ex Japan 6. Another interesting point in favour of allocating global equity indices is that they are not all about large cap companies. The market capitalisation spread of the FTSE All-World index family of global equity indices is approximately 70% large cap companies, 20% mid cap and 10% small companies. The FTSE All-World Index itself is composed of large and mid-cap companies. 3 Source: Nowhere left hide? by Todd Moss and Ross Thuotte, Centre for Global Development, Working Paper 316, March A correlation co-efficient of +/-1 implies that two securities are completely correlated, while 0 shows that they are tally uncorrelated. 4 Are emerging-market equities a separate asset class? by Anthony Saunders and Ingo Walter, Stern School of Business, New York University, Brinson, Beebower et al entitled Determinants of Portfolio Performance (1986) and Determinants of Portfolio Performance II: An Update (1991). Their conclusions were confirmed by a third study by Ibbotson and Kaplan entitled Does Asset Allocation Policy Explain 40%, 90% or 100% of Performance? (2000). 6 FTSE GEIS: A global, rigorous and comprehensive benchmark, 2012.

5 Different world view Even when looking at indices covering the same investment universe, no two indices are the same. This is because different index providers rely on different composition rules and that, in turn, determines the return and volatility profile of a given index. When selecting a benchmark index for our new global equity tracker, we considered several indices from providers including FTSE and MSCI. There are a number of differences in the way these two providers choose represent the global market. For example, Morocco is included by FTSE in their Global Equities secr but not by MSCI, as they consider Morocco be a frontier market. Looking for a global index The choice of an index is typically based on a number of facrs. In addition considering the return and volatility of the benchmark, it is also important assess what percentage of market exposure it gives along with the ease with which the fund managers can track it. This last point is crucial, as the associated facrs such as liquidity, number and availability of scks along with the most suitable replication method will have an impact on how well the fund tracks its index. Having looked at global equity indices that included the UK as well as emerging markets, we selected four with marginally higher performance over 1, 3, 5 and 10 years (please see the table Global Equity Indices Compared below). In narrowing down our selection further, we considered the number of index constituents in each of the four cases. With the indices in our list comprising between about 2,500 7,700 scks, we know that the more scks an index contains, the harder it is for a fund track it accurately. This is because trading costs are deducted from fund returns. Taking this facr in account, we were left with three indices by two different index provides, which each represented exposures between about 2,500 and 3,000 scks. In making our next choice, we had consider the fact that FTSE indices are already used for our other UK-domiciled index funds. We would like remain consistent in terms of index construction methodology and secr definitions that our funds aim replicate. Having been left with the FTSE World and FTSE All-World indices, we noted that the latter has a broader exposure emerging markets, an important asset class for equity invesrs. In contrast, the FTSE World Index is tilted wards the developed world and has no exposure about 11 emerging markets, including China, India, South Korea and Russia. Global Equity Indices Compared 8 World Indices Cumulative Performance (31/12/2015) 1 year 3 years 5 years 10 years Discrete Annual Performance 31/12/ /12/ /12/ /12/ /12/ /12/ /12/ /12/ /12/ /12/ /12/ /12/2015 FTSE All-World TR in GB %- 95% FTSE Global All Cap TR in GB cc 98% FTSE World TR in GB %- 95% MSCI AC World TR in GB cc 99% No Of Scks Market Capitalisation And the winner is... It is for these reasons that HSBC Global Asset Management has selected the FTSE All-World Index for its global equities index fund, which offers you market access at a competitive Ongoing Charge Figure (OCF) of 30 basis points (bps). Compared the rest of the market, we believe that the HSBC FTSE All-World Index fund offers a strong investment option for clients looking diversify their equity portfolio. 8 Source: Financial Express as at Past performance is not a reliable indicar of future returns. Care has been taken ensure that the information is correct but it neither warrants, represents nor guarantees the contents of the information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Financial Express Limited Registration number: Registered office: 3rd Floor, Hollywood House, Church Street East, Woking, GU21 6HJ. Telephone: Website:

6 Contact For more information, please contact us: Telephone: Website: Important Information This document is intended for Professional Clients only and should not be distributed or relied upon by Retail Clients. The material contained herein is for information only and does not constitute investment advice or a recommendation any reader of this material buy or sell investments. This document is not intended for distribution or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary law or regulation. This document is not and should not be construed as an offer sell or the solicitation of an offer purchase or subscribe any investment. Any views expressed above were held at the time of preparation and are subject change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management (UK) Limited accepts no liability for any failure meet such forecast, projection or target. HSBC Index Tracking funds are sub-funds of HSBC Index Tracker Investment Funds, an Open Ended Investment Company that is authorised in the UK by the Financial Conduct Authority. The Authorised Corporate Direcr and Investment Manager is HSBC Global Asset Management (UK) Limited. All applications are made on the basis of the relevant prospectus, Key Invesr Information Document (KIID), Supplementary Information Document (SID) and most recent annual and semi-annual report, which can be obtained upon request free of charge from HSBC Global Asset Management (UK) Limited, 8, Canada Square, Canary Wharf, London, E14 5HQ, UK, or the local distriburs. Invesrs and potential invesrs should read and note the risk warnings in the prospectus and relevant KIID and additionally, in the case of retail clients, the information contained in the supporting SID. The value of investments and any income from them can go down as well as up and invesrs may not get back the amount originally invested. Where overseas investments are held the rate of currency exchange may also cause the value of such investments fluctuate. Sckmarket investments should be viewed as a medium long term investment and should be held for at least five years. To help improve our service and in the interests of security we may record and/or monir your communication with us. HSBC Global Asset Management (UK) Limited provides information Institutions, Professional Advisers and their clients on the investment products and services of the HSBC Group, This document is approved for issue in the UK by HSBC Global Asset Management (UK) Limited which is authorised and regulated by the Financial Conduct Authority. Copyright HSBC Global Asset Management (UK) Limited All rights reserved CP/AS FP exp 19/08/2016 Designed and produced by HSBC Global Publishing Services