HSBC GLOBAL INVESTMENT FUNDS Annual Report 31 March 2008

Transcription

1 HSBC GLOBAL INVESTMENT FUNDS Annual Report 31 March 2008

2 31 March 2008 Annual Report Euroland Equity Notice of Erratum Notice is hereby given of an error on page 10 of the annual report for for the period until 31 March It is stated for Euroland Equity that "For the year ending 31 March 2008, the fund returned 12.63% (net of fees, share class AC), while equity markets in the Eurozone fell by circa 13%.". Please be advised that the return of the fund should read as "-12.63%". If you have any queries, please direct these to your bank or financial adviser or alternatively you should contact HSBC Investment Funds (Hong Kong) Limited (the Hong Kong Representative) at Level 22, HSBC Main Building, 1 Queen's Road Central, Hong Kong (telephone number: (852) ). Please accept our apologies for any inconvenience caused. HSBC Investment Funds (Hong Kong) Limited (Hong Kong Representative of ) 7 January 2009

3 Contents Page Additional notes for Hong Kong residents in relation to. The following sub-funds of referred to in this document are not authorized in Hong Kong and not available to Hong Kong residents: HSBC Global Investment sub-funds: Brazil Bond Emerging Europe Equity Euro Core Bond Euro Core Credit Bond Euro Reserve Euro Strategic Credit Bond Euroland Growth European Government Bond Global Discount Certificates Global Emerging Markets Elite Global Emerging Markets Local Debt Global Equity SRI Global ex Euroland Equity Halbis Global Marco Latin American Freestyle New World Income Sustainability Leaders Turkish Convergence US Index

4 Audited report for the year from 1 April 2007 to 31 March 2008 Société d'investissement à Capital Variable (SICAV), Luxembourg 1

5 Information concerning the distribution of shares of in Switzerland or from Switzerland. HSBC Private Bank (Suisse) SA, Quai du Général Guisan 2, case postale 3580 CH-1211 Geneva 3, is the legal representative of the Fund in Switzerland and the Fund's paying agent. The prospectus, simplified prospectuses, articles and annual and semi-annual reports of the Fund may be obtained free of charge upon request from the HSBC Private Bank (Suisse) S.A. A breakdown of all the transactions carried out on behalf of each sub-fund of in the period under review can be obtained, free of charge, from the Fund's representative in Switzerland. Information concerning the distribution of shares of in Germany or from Germany. HSBC Trinkaus & Burkhardt AG, Königsallee, D Düsseldorf, is the legal representative of the Fund in Germany and the Fund's paying agent. The prospectus, simplified prospectuses, articles and annual and semi-annual reports of the Fund may be obtained free of charge upon request from the HSBC Trinkaus & Burkhardt AG. A breakdown of all the transactions carried out on behalf of each sub-fund of in the period under review can be obtained, free of charge, from the Fund's representative in Germany. No subscription can be received on the basis of financial reports. Subscriptions are only valid if made on the basis of the current prospectus accompanied by the latest annual and the most recent semi-annual report, if published thereafter. Audited report for the year from 1 April 2007 to 31March

6 Table of Contents Board of Directors 4 Management and Administration 5 Directors Report 7 Auditor s Report 16 Statement of Net Assets as at 31 March Key Figures as at 31 March Statement of Operations and Changes in Net Assets 39 Notes to the Financial Statements 51 Comparative Table of Net Assets 91 Portfolio of Investments and Other Net Assets 108 Currency Conversion Table 219 Dealing Days of the Fund 220 Non-Dealing Days of the Fund 221 3

7 Board of Directors Simeon Brown, Chief Operating Officer, HSBC Global Asset Management (UK) Limited, 78 St James Street, London, United Kingdom (resigned on 21 September 2007) Thies Clemenz, Chief Operating Officer, HSBC Global Asset Management Deutschland Gmbh Königsallee 21/23, Düsseldorf, Germany. Didier Deleage, Chief Operating Officer, HSBC Global Asset Management (France), 4, Place de la Pyramide, Immeuble Ile de France, La Défense 9, Puteaux, France. David Dibben, Chief Operating Officer - Global Funds, HSBC Global Asset Management Limited, 21st Floor, 8 Canada Square, Canary Wharf, London E14 5HQ, United Kingdom. Deshmukh-Rao Dhondee, Assistant Manager, HSBC Offshore Banking Unit, The Hongkong and Shanghai Banking Corporation Limited, Les Cascades, 5th Floor, Edith Cavell Street, Port Louis, Mauritius. (resigned on 31 May 2007) George Efthimiou, Global Chief Operating Officer, HSBC Global Asset Management Limited, 21st Floor, 8 Canada Square, Canary Wharf, London E14 5HQ, United Kingdom. Jennifer Foo Chin Hau Kau Fong, Vice President, Customer Services, Global Business, The Hongkong and Shanghai Banking Corporation Limited, Les Cascades, 5th Floor, Edith Cavell Street, Port Louis, Mauritius. (since 31 May 2007) Bryan Greener, Head of Global Product Management, HSBC Global Asset Management Limited, Level 21, 8 Canada Square, London E14 5HQ, United Kingdom. (resigned on 4 October 2007) David Silvester, Head of Global Product Management, HSBC Global Asset Management Limited, 21st Floor, 8 Canada Square, Canary Wharf, London E14 5HQ, United Kingdom. (since 4 October 2007) Edmund Stokes, Global Chief Operating Officer, HSBC Asia/Pacific, HSBC Investments (Hong Kong) Limited Level 22 HSBC Main Building, 1 Queen s Road Central, Hong Kong. (since 4 October 2007) Sylvie Vigneaux, Head of Regulatory and Wealth Engineering, HSBC Investments (France), 4, Place de la Pyramide, Immeuble Ile de France, La Défense 9, Puteaux, France. * HSBC Investments and HSBC Group Investment Businesses Limited was renamed HSBC Global Asset Management as of 2 June This report reflects the new names. 4

8 Management and Administration Registered Office 40, avenue Monterey, L-2163 Luxembourg, Grand Duchy of Luxembourg. Management Company HSBC Investment Funds (Luxembourg) S.A., 40, avenue Monterey, L-2163 Luxembourg, Grand Duchy of Luxembourg. Custodian, Administration Agent, Transfer Agent and Central Paying Agent RBC Dexia Investor Services Bank S.A., 14, Porte de France, L Esch-sur-Alzette, Grand Duchy of Luxembourg. Investment Advisers Halbis Capital Management (USA) Inc. (formerly HSBC Halbis Partners (USA) Inc), 452 Fifth Avenue, 18th Floor, New York, NY 10018, USA. Halbis Capital Management (Hong Kong) Limited (formerly HSBC Halbis Partners (Hong Kong) Limited), HSBC Main Building, 1, Queen s Road Central, Hong Kong. Halbis Capital Management (UK) Limited (formerly HSBC Halbis Partners (UK) Limited), 8, Canada Square, London E14 5HQ, United Kingdom. Halbis Capital Management (France) (formerly HSBC Halbis Partners (France)), Immeuble Ile de France, 4, Place de la Pyramide, La Défense 9, Puteaux, France. HSBC Bank Brazil SA - Banco Múltiplo, Travessa Olivera Belo, 11-B, Curitiba, Brazil. HSBC Global Asset Management (Hong Kong) Limited, HSBC Main Building, 1, Queen's Road, Central, Hong Kong. HSBC Global Asset Management (Singapore) Limited, 21 Collyer Quay, # HSBC Building, Singapore , Singapore. HSBC Global Asset Management (USA) Inc., 452 Fifth Avenue, 18th Floor, New York, NY 10018, USA. HSBC Global Asset Management (UK) Limited, 78 St James Street, London SW1A 1EJ, United Kingdom. (until 21 May 2007) HSBC Global Asset Management FCP (France), (formerly HSBC FCP2 (France)), Immeuble Ile de France, 4, Place de la Pyramide, La Défense 9, Puteaux, France. HSBC Global Asset Management Deutschland GmbH, Königsallee 21/23, D Düsseldorf, Germany. Sinopia Asset Management (UK) Limited, 8, Canada Square, London E14 5HQ, United Kingdom (since 21 May 2007). Sinopia Asset Management, 4, Place de la Pyramide, La Défense 9, Puteaux, France. Share Distributors Global Distributor HSBC Investment Funds (Luxembourg) S.A., 40, avenue Monterey, L-2163 Luxembourg, Grand Duchy of Luxembourg. Austria, Germany and Eastern Europe Share Distributor HSBC Trinkaus & Burkhardt AG, Königsallee 21/23, D Düsseldorf, Germany. Hong Kong Representative and Share Distributor HSBC Investment Funds (Hong Kong) Limited, HSBC Main Building, 1 Queen's Road Central, Hong Kong. 5

9 Management and Administration (continued) Share Distributors (continued) United Kingdom Representative and Share Distributor HSBC Global Asset Management (UK) Limited, 78 St James Street, London SW1A 1EJ, United Kingdom. Republic of Ireland Representative HSBC Securities Services (Ireland) Limited, HSBC House, Harcourt Centre, Harcourt Street, Dublin 2, Ireland. Jersey Representative HSBC Funds Nominee (Jersey) Limited, HSBC House, Esplanade, St Helier, Jersey, JE1 1HS Channel Islands. Singapore Representative and Share Distributor HSBC Global Asset Management (Singapore) Limited, 21, Collyer Quay, #15-02 HSBC Building, Singapore , Singapore. Swiss Representative and Paying Agent in Switzerland HSBC Private Bank (Suisse) S.A., Quai du Général Guisan 2, Case postale 3580, CH-1211 Geneva 3, Switzerland. Korea Representative and Share Distributor HSBC Korea Ltd, HSBC Building #25, 1-Ka, Bongrae-Dong, Chung-Ku, Seoul, Korea. Distributor for Continental Europe HSBC Global Asset Management (France), Immeuble Ile de France, 4, Place de la Pyramide, La Défense 9, Puteaux, France. Central Paying Agent RBC Dexia Investor Services Bank S.A., 14, Porte de France, L-4360 Esch-sur-Alzette, Grand Duchy of Luxembourg. Paying Agent in Hong Kong The Hongkong and Shanghai Banking Corporation Limited, HSBC Main Building, 1, Queen s Road Central, Hong Kong. Auditor KPMG Audit S. à r. l., 9, allée Scheffer, L-2520 Luxembourg, Grand Duchy of Luxembourg. Legal Advisers Elvinger, Hoss and Prussen, 2, place Winston Churchill, B.P.425, L 2014 Luxembourg, Grand Duchy of Luxembourg 6

10 Directors Report Directors Comments The Directors present the Audit Annual Report and Accounts for for year ending 31 March Reserve Sub-Funds HGIF Euro Reserve For the year ending 31 March 2008, the fund returned 3.74% (net of fees, share class AC), against a benchmark return of 4.05%. The major event of this year was the US sub-prime crisis, which quickly shifted into a credit crunch and a liquidity crisis during the tail end of Over the last year, monetary and financial conditions got tighter. The fund took advantage of tensions in the money market which have pushed up short term rates. Even if Euro growth remains robust after two years of sustained growth, the Euro area economy should come back down. On the inflation side, energy and food prices add strong pressure, giving little room for the European Central Bank to cut rates to support growth. In this context, the strategy of the fund is to provide liquidity for the shareholders. We mainly invest in monthly bonds for the most significant part of the fund during last months. HGIF US Dollar Reserve For the year ending 31 March 2008, the fund delivered a return of 3.81% (net of fees, share class AC) under performing the benchmark by 0.15% in US dollar terms. With a stronger focus on safety and liquidity over the second half of 2007, the fund was weighted more heavily in treasury bills. As the Federal Reserve initiated various means of supporting liquidity, highlighted by 3% worth of easing, the fund has gradually shifted back into the taxable market, predominantly in the Banking and Financial sector. Bond Sub-Funds HGIF Brazil Bond For the year ending 31 March 2008, the fund delivered a return of 17.22% in terms (net of fees, share class AC), compared to the benchmark return of 31.10%. The performance of the Brazilian currency was a key factor, buoyed by positive fundamentals: attractive interest rates, high level of reserves, and an international environment that is particularly favorable to commodities exporters. While the basic rate dropped 150 bps to 11.25%, worries about above potential growth and its effects on inflation caused the long end of the curve to widen by 200 bps in the last 6 months, affecting bond returns. HGIF Euro Core Bond For the year ending 31 March 2008, the fund delivered a return of 1.28% (net of fees, share class AD) underperforming the benchmark by 0.63%. A prudent policy in terms of asset allocation and issuer selection minimized the impact of the financial crisis on performance: Before the outbreak of the credit crisis the fund maintained a lower exposure than the benchmark to credit risk, favouring higher-rated bonds rather than speculative ones but we added progressively more and more exposure and we finally suffered from our credit exposure. Moreover the recent strong and rapid flattening of the European government rate curve was negative for our steepening position in the first quarter HGIF Euro Core Credit Bond For the year ending 31 March 2008, the fund delivered a return of -4.06% (net of fees, share class AC) underperforming the benchmark by 1.51%. The massive credit sell-off since July 2007 has badly affected the fund's performance. With a high yield bucket around 8 % (10% max), compared to a pure investment grade benchmark, the challenge was hard. Despite numerous profitable operations in the primary market our overweight on financial subordinated bonds had a negative impact in this financial turmoil. However, the recent events surrounding mid-march (Bear Stern s rescue, primary dealer credit facility, massive liquidity injections) seem to have marked a key turning point in market sentiment and last month's performance was positive vs benchmark. HGIF Euro High Yield Bond For the year ending 31 March 2008, the fund delivered a return of -9.73% (net of fees, share class AC) outperforming the benchmark by 0.98%. A prudent policy in terms of asset allocation and issuer selection were the main contributors to this outperformance: before the outbreak of the credit crisis the fund maintained a lower exposure than the benchmark to credit risk, favouring higher-rated bonds rather than the most speculative ones. As the credit crisis developed, the fund progressively took more and more exposure to the market as we felt adequately remunerated for doing so. Currently the fund has a high exposure to the Euro High Yield market but we keep an average credit quality higher than the benchmark because of a significant underweight position on the most speculative bonds. 7

11 Directors Report (continued) HGIF European Government Bond For the year ending 31 March 2008, the fund delivered a return of 0.08% (net of fees, share class AC) underperforming the benchmark by 1.28% in Euro terms. The fund was positioned partly long credit and European Eastern countries when the financial crisis began in the early summer. As a result of this substantial reassessment of risk, the fund underperformed its benchmark which induced large redemptions in an illiquid environment. At end of March 2008, the fund was running 0.50% higher than its benchmark which should be positive if the credit sentiment turns back. HGIF Euro Strategic Credit Bond For the year ending 31 March 2008, the fund returned -6.39% (net of fees, AC share class) against benchmark returns of -3.36%. Global credit markets experienced considerable volatility and saw spreads rise sharply across the board, as the US housing sector crisis and large write-downs of credit exposures by major financial institutions caused concerns about a weakening macro-economy. While the fund increased its underweight in high yield issuers over the course of the year due to worsening outlook, we decreased only slightly our overweight in subordinated financial and non-financial investment grade issuers for relative value reasons. In addition to the overweight in subordinated names, our credit curve positioning (overweight in the 5-10 year part) and the longcredit duration bias over the period added to the fund s relative underperformance. Although macro risks arise from a further uptick on the inflation side due to rising commodity prices, we expect corporate fundamentals in the Eurozone to stay benign and supportive of spreads. Overall, as market tensions ease and fears of a systematic banking crisis abate, we have a modestly positive market outlook. HGIF Global Core Plus Bond For the year ending 31 March 2008, the Global Investment Grade Bond Fund returned 11.94% (net of fees, share class AC), underperforming the benchmark s return of 15.25%. While the general decline in interest rates resulted in positive returns over the period for global fixed income investors, negative excess returns in credit and securitized product detracted from performance. The sectors hit the worst were high yield corporate bonds, CMBS, investment grade corporate credit and emerging markets, which suffered excessive negative returns. In addition, yield differentials and an increasingly questionable economic environment in the US contributed to a substantial depreciation of the US Dollar. Sector and security selection within the credits and securitized markets detracted from the fund s overall performance. HGIF Global Emerging Markets Bond For the year ending March 2008, the Fund returned 2.68% (net of fees, AC share class). We gradually increased the fund s exposure to local currency over the course of the year and this strategy contributed positively to performance. We also increased the exposure to -denominated corporate bonds when we felt there was more value over comparable sovereign issues. Emerging market fundamentals remain strong at this point although rising inflation levels are the source of longer-term concern. Strong technical factors in emerging markets have buoyed performance and we expect capital markets to strengthen. The current portfolio has few sovereign underweights/overweights vs. the index and it maintains small overweight holdings in local currency and corporate debt. HGIF Global Emerging Markets Local Debt Since its inception in July 2007 through March 2008, the Fund returned 4.92% (net of fees, AC share class) compared with the benchmark return of 4.00%. Country selection was the primary driver for positive performance during the period. We expanded the exposure beyond core emerging market countries by building positions in frontier markets in Asia and Africa. Emerging market fundamentals remain strong at this point although rising inflation levels are the source of longer-term concern. Strong technical factors in emerging markets have buoyed performance and we expect capital markets to strengthen. At the end of March 2008, the Fund was fully invested through a combination of cash and forward positions with a bias towards Latin America and underweight holdings in Eastern European markets and Asia. HGIF Global High Yield Bond For the year ending 31 March 2008, the Global High Yield Fund returned 3.29% (net of fees, share class AC, outperforming the benchmark s return of -3.53%. Heightened risk aversion fuelled a flight-to-quality during the period as the Treasury market rallied. This, coupled with reduced expectations for economic growth caused credit spreads to widen and the high yield sector to under-perform US Treasuries over the period. The strategy s underweight exposure to homebuilders and related sectors as well as financials and overweight to Energy proved beneficial during the period. These gains were somewhat mitigated by an overweight exposure in B-rated quality sector which slightly underperformed the BB-rated quality sectors. 8

12 Directors Report (continued) HGIF US Dollar Core Plus Bond For the year ending 31 March 2008, the US Dollar Core Plus Bond Fund returned 1.45% (net of fees, share class AC), underperforming the benchmark s return of 7.76%. While the general decline in interest rates resulted in positive returns over the period for US fixed income investors, negative excess returns in spread sectors detracted from performance. The sectors hit the worst over the period were securitized, high yield corporate bonds, investment grade corporate credit and emerging markets. The fund s underperformance was the result of overweight allocations to the corporate and securitized sectors. These losses were somewhat mitigated by a long duration positioning relative to the benchmark which performed well as interest rates decreased. Equity Sub-Funds International and Regional Equity Sub-Funds HGIF Asia ex Japan Equity For the year ending 31 March 2008, the fund delivered a return of 14.20% (gross of fees, share class AC), underperforming the benchmark by 1.98% in US Dollar terms. Stock selection in Korea consumers, Taiwan materials and a favourable underweight to Chinese Financials offset underperformance in South East Asia, notably Singapore. The risk to earnings and inflationary pressures present potential difficulties to markets that are not necessarily immune to financial market volatility. Our emphasis in Asia continues to focus on themes that are uncorrelated to the global business and credit cycles, and domestic focused opportunities such as consumption and infrastructure. Value and dividends are a focus, as these characteristics offer defensive benefits in times of volatility. HGIF Asia ex Japan Equity Smaller Companies For the year ending 31 March 2008, the fund delivered a return of 3.85% (net of fees, share class AC) in US Dollar terms, compared with the benchmark return of 17.90%. Favourable stock selection in Malaysia and Taiwan materials were offset by underperformance in South East Asia, Hong Kong and China. The risk to earnings and inflationary pressures present potential difficulties for markets that are not necessarily immune to financial market volatility. Our emphasis in Asia continues to focus on themes that are uncorrelated to the global business and credit cycles, and domestic focused opportunities such as consumption and infrastructure. Value and dividends are a focus, as these characteristics offer defensive benefits in times of volatility. HGIF Asia Pacific ex Japan Equity High Dividend For the year ending 31 March 2008, the fund delivered a return of 17.55% (net of fees, share class AD), outperforming the benchmark by 5.90% in US Dollar terms. Stock selection in Malaysia, Taiwan and a favourable underweight position to Australia all contributed positively to relative performance. The risk to earnings and inflationary pressures are potential headwinds to markets that are not necessarily immune to financial market volatility. Our emphasis in Asia continues to focus on themes that are uncorrelated to the global business and credit cycles, and domestic focused opportunities such as consumption and infrastructure. Value and dividends are a focus, as these characteristics offer defensive benefits in times of volatility. HGIF BRIC Markets For the year ending 31 March 2008, the fund returned 32.40%, outperforming the index by 1.45% Of the four markets, Brazil saw the strongest performance over the period, rising 56.9%. Country allocation has generally favoured Brazil and Russia over the review period, while the China position has varied between marginally overweight to neutral. The recommended allocation to India remains consistently underweight relative to the equally weighted country benchmark. HGIF BRIC Markets Equity For the year ending 31 March 2008, HGIF BRIC Markets Equity returned 30.87% (net of fees, share class AC) in US Dollar terms compared with the benchmark return of 30.95%. Within the BRIC Markets, Brazil posted the strongest performance in US dollar terms. This market benefited from the rise of Petrobras and Vale do Rio Doce, which weigh nearly 50% of the MSCI Brazil index, and from the appreciation of the Real currency. In terms of performance ranking, Brazil was followed by India and China. Russia underperformed significantly the other BRIC markets. The fund benefited from its overweight exposure to Brazil. HGIF Climate Change HGIF Climate Change was launched on 9 November As of 31 March 2008, the fund has delivered a % performance (net of fees, share class AC). Main contributors to the Fund s performance were Vestas Wind, Iberdrola, Ja Solar Holdings and Q-Cells. In the coming months the fund will maintain its current investment policy which primarily consists in selecting climate-change related stocks based upon a multi-criterion strategy. 9

13 Directors Report (continued) HGIF Emerging Europe Equity For the year ending March 2008, the fund delivered a return of -9.05% (net of fees, share class AC) compared with the benchmark return of -5.94%. Despite Eastern European economies benefiting from higher oil prices and suffering little directly from the subprime crisis, most equity markets in the region were not able to decouple from the weak global equity trend. Stock selection in the Russian market as well as in Poland contributed positively to performance during the period whereas stock selection in the Turkish market contributed negatively. For 2008/09 we expect strong growth for Eastern Europe to continue, with inflation trends being one of the main risk factors. The fund manager continues to look for reasonably priced growth stocks benefiting from positive trends within the region, e.g. infrastructure investments. HGIF Emerging Wealth For the year ended 31 March 2008 and since its launch on 7 December 2007, HGIF Emerging Wealth returned % (net of fees, share class A) in US Dollar terms. The fund seeks to benefit from the emerging countries growth. With slowing economic perspectives, the fund benefited from its underexposure during the period. The financial sector underweight was the best contributor to the fund relative return. Our stock selection model is still unfavourable to bank stocks and prefers energy stocks. Unfortunately the fund was over exposed to energy and these stocks did not benefit in the past few months from the increasing oil price. HGIF Euroland Equity For the year ending 31 March 2008, the fund returned 12.63% (net of fees, share class AC), while equity markets in the Eurozone fell by circa 13%. The year was dominated by the crisis in the financial sectors, which led to severe tightening in credit conditions especially for the banking sector and by the clear slowing of the US, and therefore the global economy. The fund outperformed (performance numbers and share class needed), driven by the stock selection implemented. Key contributors to the overall performance of the fund were Telefonica, Grifols, Syngenta, Mittal Steel and Numico. Key detractors were found in the financial sector (Unicredito, ING) or in the mid-cap segment of the market (C&C, Smurfit Kappa). We continued to select stocks based on the relative underappreciation by investors of their current and future profitability which delivers a low turnover portfolio. We reduced two underweight sector holdings namely in banking (BNP, Santander) and energy (Repsol). Key sectors healthcare (Fresenius, Grifols), insurance (Allianz) and telecoms (KPN, Telefonica) were maintained or even reinforced. Similarly, the fund remained underexposed to consumer goods and utilities. We foresee a volatile time for equity markets in the short term. This said, investors have already priced in a weaker background and, as the situation improves, we can expect markets to resume their upwards trend. HGIF Euroland Equity Smaller Companies The Euroland Equity Smaller Companies fund posted a return of % (net of fees, share class AC) and fell in line with the benchmark. Outperformance was mainly generated in the first six months of the period, before the US sub prime crisis. The growth bias of the portfolio was subsequently a negative despite profit-taking on high valuations at the end of July and a rebalancing in favour of more defensive stocks. After a difficult January, the fund recovered in February and March. The US Federal Reserve has taken forceful actions to restore confidence: real short-term interest rates are close to zero and should be highly supportive of global growth. The fund is currently a balanced portfolio, with some non-cyclical stocks but, in the main, growth companies with high visibility of earnings chosen for valuation reasons. HGIF Euroland Growth (formerly Euroland Value Creation) HSBC GIF Euroland Growth posted a return of % (net of fees, share class M1C) over 12 months ending 31 March 2008, against % for its benchmark. Performance was thus negative relative to the fund's benchmark. The fund changed strategy in late 2006 and adopted a growth bias. The fund changed its name from HSBC GIF Euroland Value Creation to HSBC GIF Euroland Growth to take into account this change in investment style. This past year is thus the first during which the fund's growth strategy has been clearly implemented. As such, the fund strongly benefited from the recent financial turmoil as investors sold overvalued leveraged companies and purchased less cyclical high-quality companies. Because of the fund's growth orientation, the strategy focuses on a company's capital cycle; as such, all positions are held on the basis of long-term fundamentals; the approach consists in favouring rising fundamentals more than valuation opportunities arising from excess short-term volatility. HGIF European Equity For the year ending 31 March 2008, the fund returned % (net of fees, share class AC) underperforming the benchmark by -5.00%. The performance of the individual stocks reflected sector moves over this twelve month period which included significant global financial problems from August The weaker performances arose in financial stocks where companies faced significant write-downs from highly rated instruments linked to the US mortgage market. These included Hypo Real Estate, UniCredit and UBS. In addition, a number of investments fell because of concerns about cyclicality: Punch Taverns, Smurfit Kappa and Lanxess. The stronger performers were companies that have been able to grow cashflows in the current environment; Syngenta produces seeds and crop protection products; Acciona has grown its windfarm business; Nestle has restructured its portfolio of brands and manufacturing bases; and Casino has grown food sales through its successful value proposition. 10

14 Directors Report (continued) HGIF European Equity High Dividend For the year ending 31 March 2008, the fund delivered a return of % (net of fees, share class AC) underperforming the benchmark. Over the last year, we have favoured dividend growth over high yield. In retrospect, this has been the right decision; however, mid caps both in the high yield and the high growth space contributed negatively. The relative underperformance has accentuated since last quarter as the fund took a more defensive bias with we got the timing wrong. For the coming months, we believe companies with strong dividend power, i.e. high yields that are relatively safe thanks to a low payout ratio and strong credit ratings should be more resilient in the face of an earnings recession. However, news flows and sentiment will continue to prevail in the short term and our high exposure to the financial sector could be volatile. HGIF Global Emerging Markets Elite For the year ending 31 March 2008, the fund delivered a return of 24.55% (net of fees, share class AC) compared with the benchmark return of 21.70% saw global emerging markets perform strongly relative to broader global indices. The fund s performance benefited from positive stock selection in the industrial sector in Egypt, particularly companies involved in the growth of infrastructure in the Middle East. Stock selection in the information technology sectors of Taiwan and Russia also contributed positively to performance. Over the first quarter of 2008, emerging markets corrected as global equity markets reacted to signs of a slowdown in economic growth and as investors considered the ramifications of the credit crisis in the financial system. We are inclined to think that the worst of the credit crisis is over, but remain cautious for the outlook for growth going forward, in the light of rising inflation and interest rates across the emerging world. HGIF Global Emerging Markets Equity For the year ending 31 March 2008, the fund delivered a return of 21.40% (net of fees, share class AC) compared with the benchmark return of 21.70% saw global emerging markets perform strongly relative to broader global indices. The fund benefited from positive stock selection in the industrial sector in Egypt, particularly companies involved in the growth of infrastructure in the Middle East. Stock selection in the information technology sectors of Taiwan and Russia also contributed positively to performance. Over the first quarter of 2008, emerging markets corrected as global equity markets reacted to signs of a slowdown in economic growth and as investors considered the ramifications of the credit crisis in the financial system. We are inclined to think that the worst of the credit crisis is over, but remain cautious for the outlook for growth going forward, in the light of rising inflation and interest rates across the emerging world. HGIF Global Equity For the year ending 31 March 2008, the fund returned -2.15% (net of fees, share class AD) only slightly outperforming the benchmark by which fell 2.77%. The performance of the individual stocks reflected sector moves over this twelve month period which included significant global financial problems from August The weaker performances arose in financial stocks where companies faced significant write-downs from highly rated instruments linked to the US mortgage market. These included UniCredit, Merrill Lynch and AIG. In addition, the Japanese holdings were weak with the market underperforming the MSCI World. The stronger performers were companies that have been able to grow cashflows in the current environment: John Wood enjoyed significant growth in cashflows from supplying services to the booming oil industry; Rio Tinto was a strong beneficiary of rising commodity prices; the strong rise in the share price of Novo Nordisk reflected its strength and market dominance in supplying drugs and drug delivery systems to diabetics; and Syngenta produces seeds and crop protection products which have been in demand with food prices high. HGIF Global Equity SRI For the year ending 31 March 2008, the fund delivered a return of -7.61% (net of fees, share class AC), compared to a return of -2.77% for the MSCI World Index. Stock selection in the energy and materials sectors contributed negatively, offsetting positive stock selection in the automobiles and real estate sectors. An underweight in energy contributed negatively towards performance over the year, whilst an overweight in banks contributed positively. We continue to favour companies which have good valuation and momentum on our stock scoring system. HGIF Sustainability Leaders For the year ending 31 March 2008, the performance of the fund has lagged the benchmark significantly, against a slight outperformance, (gross of fees of 0.2%) last year to an underperformance gross of fees of 23.70% at end March 2008 (share class M1C). The strategy of the fund is to focus on the best SRI-ranked stocks in the Pan European universe with an emphasis on environmentally friendly small caps. The underperformance of the best SRI companies over the last 12 months has been unprecedented during a period that has favoured momentum factors over fundamental valuation factors. Exposure to small caps, financial companies, materials and capital goods particularly in smaller companies with innovative technologies has also been a major contributor to this underperformance. 11

15 Directors Report (continued) Market Specific Equity Sub-Funds HGIF Brazil Equity The market had a strong absolute performance during the period due to the positive local fundamentals with inflation under control, a good fiscal position and strong external accounts. In such an environment, Brazilian companies delivered earnings growth in excess of 25% in during the period. This fact explains a good part of the performance. Before the sub prime crisis in the US in August, the market performance was broad based with small and mid caps doing even better than large caps. After the start of the crisis, the liquid and mega caps outperformed. This fact explains part of the relative underperformance of the fund in the second part of the period. However, even after the crisis, the macro situation remains solid with GDP growing by more than 4.5%, record foreign reserves and good fiscal situation. HGIF Chinese Equity For the year ending 31 March 2008, the fund delivered a return of 19.10% (gross of fees, share class AC), compared with the benchmark return of 29.80%. Investors displayed appetite for investing in China, especially during the first half of the year. Stock selection was mixed with positive stock selection from financials and materials. Energy, consumers and telecommunications were negative contributors. With the market having corrected since the beginning of 2008, inflationary pressures and global volatility present potential setbacks. Consequently, our emphasis in China continues to focus on domestic themes and opportunities such as consumption and infrastructure. HGIF Hong Kong Equity For the year ending 31 March 2008, the fund delivered a return of 12.05% (gross of fees, share class AC), underperforming the benchmark by 497 basis points in US Dollar terms. Favourable stock selection in Financials, energy and industrials was offset by underperformance in technology, utilities and materials. With the market having corrected since the beginning of 2008, value is slowly reappearing. The risk to earnings however and inflationary pressures present potential difficulties for a market that is not necessarily immune to global financial market volatility. HGIF Indian Equity For the year ending 31 March 2008, the fund delivered a return of 38.54% (gross of fees, share class AC), outperforming the benchmark by 7.87% in US Dollar terms. Favourable contributions came from overweights to materials, technology and underweights to telecommunications and financials complimented strong stock selection. With the market having come down significantly in the first quarter of 2008, valuations are at a more reasonable level. While the economy is decelerating, we see little risk to at least mid-teens earnings growth over the next 3-4 years and an expansionary fiscal policy stance should boost consumption further. We continue to favour deep value sectors such as material and technology and underweight sectors with excessive valuations. HGIF Japanese Equity For the year ending 31 March 2008, the Japanese Equity Fund (share class AD) returned 30.43% (net of fees) in Japanese yen terms, underperforming its peer group average. The Fund s underperformance is mainly due to the stock selection negative results, over Q and Q Stock selection underperformance is mainly due to the exposure to most liquid stocks that suffered at most from the flight to quality generated by sub prime mortgage crisis. The sector allocation results were nevertheless, significantly positive, mainly gains stemming from exporters over-weighting in Q as well as utilities underweighting over the whole period. Risk was strictly monitored, which was critical as market volatility skyrocketed by July Our expectations for the Japanese market are moderate. Valuations are attractive but protracted earning downgrades currently alter our positive signal strength. We remain positive on the Japanese equities in the medium term with a preference towards capital good stocks. HGIF Korean Equity For the year ending 31 March 2008, the fund delivered a return of 12.42% (gross of fees, share class AC) in US Dollar terms. Favourable stock selection in consumer related industries and the materials and technology sector contributed positively to performance. The risk to earnings and inflationary pressures present potential difficulties for a market that is exposed to the global growth cycle. Positively, the Korean market appears reasonable value, trading at a discount to the region. Moreover, the global cyclical sectors (shipbuilding, machinery, refineries) which have corrected significantly in the beginning of 2008 should rebound on positive global macroeconomic data. HGIF Russia Equity The fund was launched on 17 December From its inception date to the end of March 2008 the fund delivered a return of -6.95% (gross of fees, share class AC) outperforming the benchmark by 0.33% in US dollar terms. Since launch, the fund was overweight coal and underweight oil, which was positive for performance. Over the first quarter of 2008, the Russian equity market corrected as global equity markets reacted to signs of a slowdown in economic growth and as investors considered the ramifications of the credit crisis in the financial system. We are inclined to think that the worst of the credit crisis is over, but remain cautious for the outlook for growth going forward, in the light of rising inflation and interest rates across the emerging world. Relatively to other global emerging markets, however, we remain positive on the long-term outlook for the Russia and continue to find excellent investment opportunities. 12

16 Directors Report (continued) HGIF Singapore Equity For the year ending 31 March 2008, the fund delivered a return of % (net of fees, share class AC), underperforming the benchmark by 24.00%. Favourable allocations to materials and consumers were offset by negative contribution from several sectors, notably property and tourism and leisure. Valuations going into 2008 remain reasonably attractive; however with a strengthening Singapore dollar and rising costs, we are cautious in the shorter term with a focus on companies with a domestic focus. HGIF Thai Equity For the year ending 31 March 2008, the fund delivered a return of 35.56% (net of fees, share class AC), underperforming the benchmark by 4.77%. Favourable asset allocations in materials and utilities and positive stock selection in Financials and materials was offset by negative stock selection in the telecommunication and consumer sectors. Thailand remains inexpensive relative to other Asian markets and we believe that, notwithstanding the perception of lingering political risk, domestic demand could be positive in the forthcoming year as the government continues to support the domestic economy further with an expansionary fiscal policy. HGIF UK Equity For the year ending March 2008, the fund returned -7.76% (net of fees, share class AC) compared to the benchmark return of -7.70%. The performance of the individual stocks reflected sector moves over this twelve month period which included significant global financial problems from August The weaker performances arose in Financial stocks such as HBOS which has faced significant write-downs from highly rated instruments linked to the US mortgage market. In addition, a number of investments fell because of concerns about cyclicality: Punch Taverns, United Business Media and SIG. The stronger performers were generally in the Basic Materials and Oil & Gas sectors with Johnson Matthey enjoying high demand for platinum-group products, Petrofac benefiting from better pricing and demand for its oil services and BG Group discovering significant new gas fields in Brazil. HGIF US Equity For the year ending 31 March 2008, HGIF US Equity delivered a -3.57% loss (gross of fees, share AC) in US dollar terms, outperforming its peer group average, which declined by 5.10%. The US market posted its biggest drop since August after banks and brokerages wrote down holdings of debt securities and set aside more money for bad loans. The fund benefited from good sector allocation based on our quantitative valuation of the market. The main gain came from the underweighting of the financial sector. The stockpicking, based on a stock s selection within the sectors with strong earning momentum, also generated a positive contribution to the fund performance. We anticipate a protracted slowdown of the US economy and further negative impact on US companies earnings. Accordingly, our valuation signals deteriorated as opportunities are now lower. HGIF US Index The overall performance of the fund to the 31 March 2008 was -6.94%, compared with the benchmark return of -5.10%, (gross of fees, share class AC). From the 1 April 2007 until the end of September 2007, the fund returned +8.50% (gross of fees) in US dollar terms. Within the S&P 500 index, the best performing sectors were Energy, Information Technology and Industrials whilst Insurance, Consumer Discretionary and Financials underperformed the index. The housing crisis that started in July in the US and the extraordinary rise of the oil prices (the oil index WTI rose 17.10% over that period) during September especially, mainly explains the sector breakdown of the contribution to return over the period. The period was strongly volatile and came back to a rising trend at the end of the period only with the help of the FED cutting its interest rates by 0.50%. Over the fourth quarter of 2007, the oil price experienced sustained gains, posting a succession of fresh record highs. US inventories declined, demand remained strong and OPEC resisted calls for production increases. Ongoing turbulence in the US-sub-prime market continued to pervade world financial markets and the credit crunch showed no signs of improvement as inter-bank lending rates returned to the levels experienced during the summer. December saw the US Federal Reserve cut interest rates by 0.25% to 4.25%. The outlook for the US economy fluctuated throughout the fourth quarter. The third quarter earnings season provided an unconvincing start, with Alcoa missing estimates and investment banks formalising their sub-prime losses. Merrill Lynch fell sharply during October, as the group dramatically increased the write down of sub-prime related. Over the last three months, escalating concerns about the outlook for the global economy, further worrying headlines emanating from the financial sector and a marked downturn in corporate earnings all added to the overwhelming sense of nervousness among investors. The extent of concern was demonstrated in the US Federal Reserve s unexpected reduction in interest rates, with a 0.75% cut being implemented just a matter of days before the scheduled January meeting, where rates were reduced by a further 0.5%. The US Federal Reserve downgraded their growth expectations, whilst simultaneously increasing their forecast for inflation, a scenario that raised worries about stagflation. The adverse market conditions also hit previous stock market favourites, including the likes of Apple, which fell 31% over January as a result of concerns about consumer spending and also following the outlook statement from the group. Microsoft was also in the headlines as the group announced a $44bn bid for Yahoo, and was fined $1.4bn later in the month by European regulators on anti-trust issues. 13

17 Directors Report (continued) For the period starting 1 October 2007 and ending 31 March 2008, the S&P500 returned %. Consumer Staples, Energy and Materials were the best performing sectors returning and Financials, Telecommunication Services and Consumer Discretionary underperformed the index. At the end of March 2008, the funds stood at 38.3 million. The ex-ante tracking error calculated with Barra remained low through the period with 0.02%. Freestyle Sub-Funds HGIF Asia Freestyle For the year ending 31 March 2008, the fund delivered a return of 14.94% (gross of fees, share class AC) in US Dollar terms. Stock selection in China and Taiwan contributed positively to the portfolio, conversely selection in Singapore was less favourable. The risk to earnings and inflationary pressures present potential difficulties for to markets that are not necessarily immune to financial market volatility. Our emphasis in Asia continues to focus on themes that are uncorrelated to the global business and credit cycles, and domestic focused opportunities such as consumption and infrastructure. Value and dividends are a focus, as these characteristics that offer defensive benefits in times of volatility. HGIF BRIC Freestyle For the year ending March 2008, the fund delivered a return of 26.30% (gross of fees, share class M1C). The fund benefited from its positions in Latin America. Brazil, which is a large component of the fund, delivered the highest absolute return. Brazilian energy and materials positions performed particularly well. Materials and telecoms holdings in China contributed to making China the second best contributor to the fund s absolute return. India and Russia also had positive performances over the year. Of the four markets in the BRIC fund, the position in Russia was the largest, based upon a positive outlook of its economy and companies within it, relative to the other three. The smallest relative position was in India, where the outlook for the short term is not so positive although the longterm view remains strong. Over the first quarter of 2008, the BRIC markets corrected as global equity markets reacted to signs of a slowdown in economic growth. Investors considered the ramifications of the credit crisis in the financial system and what these issues would do to economic growth in these markets. We are inclined to think that the worst of the credit crisis is over, but remain cautious for the outlook for growth going forward, in the light of rising inflation and interest rates across the emerging world. HGIF Global Emerging Markets Equity Freestyle For the year ending March 2008, the fund delivered a return of 17.86% (gross of fees, share class M1C). In Asia, positions in the fund in Taiwan and Korea made strong contributions to the absolute return. The fund s performance benefited from positions in Latin America. Brazil, which is a large component of the fund, delivered a positive contribution to the absolute return. The fund s performance also benefited from positions in the industrial sector in Egypt, particularly companies involved in the growth of infrastructure in the Middle East. Over the first quarter of 2008, emerging markets corrected as global equity markets reacted to signs of a slowdown in economic growth and as investors considered the ramifications of the credit crisis in the financial system. We are inclined to think that the worst of the credit crisis is over, but remain cautious for the outlook for growth going forward, in the light of rising inflation and interest rates across the emerging world. HGIF Latin American Freestyle For the year ending 31 March 2008, the fund delivered a return of 30.20% (gross of fees, share class M1C). The Latin American markets had a good overall performance over the period performance numbers and share class needed. The region benefited not only from the stronger commodities prices but also from good internal fundamentals: inflation remains under control (on average around 5%), the fiscal situation has improved and there is more credit available. The best performing countries over the period were Peru and Brazil. Mexico lagged mainly in the second half of 2007 as a consequence of the slowdown in the US economy but recovered part of the underperformance in the first three months of The good situation in the region is a consequence of the set of good economic policies adopted in the recent year, namely inflation targeting, flexible exchange rates and sensible fiscal policies. With a few exceptions (Argentina, Venezuela, Colombian and Ecuador) most of the countries have adopted those policies. As a result, the region did very well despite the crisis in the US. 14