HSBC World Index Portfolios A range of multi-asset passive portfolios World Index. One World. One Investment For professional clients only December 2012
We understand your business is changing The advisory market is going through a period of significant change. Increased client expectations and regulations are having a significant impact on how you run your investment business now, and how you may choose to run it in the future. With the ever-growing to do list just to stay compliant, as well as the need to reduce risk and costs in your business, how prepared are you for: Retail Distribution Review (RDR) when you must deliver a consistent investment process and a robust paper-trail The changing investment world and potentially increased opportunities: lower economic growth in developed economies; and higher-growth but possibly higher-risk in emerging markets New Financial Services Authority (FSA) regulations ensuring clients portfolios have an optimal risk/return level Greater demands for cost transparency from clients and regulators The need to control your overheads and make your business efficient The bottom line is investors and regulators are increasingly demanding value for money. Why passive investing is a potential RDR-ready solution There has long been a debate about the potential for active managers to beat their benchmarks and justify their fees. And an examination of individual manager performance over the longer-term shows that the potential of each manager to maintain a position of outperformance is limited. 1. Passive investing offers a cost-efficient way to access global opportunities. Although a group of active managers may outperform a given index, the chart below shows that individual manager outperformance falls dramatically each subsequent year across three different indices. Therefore, on the example below the probability of a manager outperforming three years in a row is less than 43%. So when you choose to pay the premium for an active manager it is not only important to identify the best managers, but also to review and replace them at the right point in time. A low-cost passive fund may be an intelligent option. Persistence of skill active managers outperforming their respective benchmarks in consecutive years.* S&P 500 FTSE All Share MSCI Emerging Markets 2. Passive funds are neatly aligned with the requirements of RDR, where value and cost matter to clients. 3. Active fund research is going to become a more-significant burden on advisers time and resources. These three factors increase the relative attractiveness of passive investment. 1 Yr 2 Yrs 3 Yrs 1 Yr 2 Yrs 3 Yrs 1 Yr 2 Yrs 3 Yrs 45.30% 43.86% 42.48% 41.98% 38.92% 37.93% 40.48% 35.71% 33.60% Source: Morningstar Direct, average % of managers outperforming relative to their primary prospectus benchmark, data analysed covers the period 1 January 2001-31 December 2011. Returns for S&P 500 & MSCI Emerging Markets calculated in USD, returns for FTSE All Share calculated in GBP. Past performance is not a guarantee of future returns 2
Our sophisticated multi-asset passive solution Our HSBC World Index Portfolios are single-fund solutions global, multi-asset funds that primarily hold passive investment products, namely index tracking funds, ETFs and direct fixed interest holdings where these can be bought cheaper. All of the portfolios are invested across developed and emerging markets. Additionally, we don t just invest in traditional asset classes; we can also invest in property, private equity, commodities and other non-traditional assets. With HSBC s World Index Portfolios, your clients will have the opportunity to access the expertise of our well-resourced and highly qualified investment teams managing the portfolios and their asset allocation. And our regular portfolio rebalancing ensures that they remain in line with their agreed risk levels all at an extremely low annual charge of 0.5%. HSBC World Index Portfolios at a glance HSBC World Index Cautious HSBC World Index Balanced HSBC World Index Dynamic Equity Fixed Income Alternative Liquidity US Equity (hedged in GBP) US Treasuries Commodity Cash Europe (hedged in GBP) UK Gilts Property UK Equity Global Corporate Bonds Private Equity Japan Equity (hedged in GBP) UK Inflation Linked Bonds Asia Pac ex-japan Equity Global High Yield Bonds Global Emerging Market Equity Global Emerging Market Debt Global Local Currency EMD Source: HSBC Global Asset Management, October 2012. For illustration only. May change without further notice. Hedged indicates that a high percentage or all of the exposure in assets denominated in currencies other than GBP are hedged back to the HSBC World Index Portfolio s base currency, GBP, to manage currency risk. US Equity (hedged in GBP) Europe (hedged in GBP) Cautious Balanced Dynamic 4.90% 12.36% 14.91% 4.26% 11.02% 15.71% UK Equity 5.28% 12.34% 15.85% Japan Equity (hedged in GBP) Asia Pac ex- Japan Equity Global Emerging Market Equity 2.81% 6.08% 4.91% 0.65% 3.30% 8.74% 2.11% 8.43% 12.85% US Treasuries 17.60% 5.97% 1.64% UK Gilts 24.78% 13.16% 10.62% Global Corporate Bonds UK Inflation Linked Bonds Global High Yield Bonds Global Emerging Market Debt Global Local Currency EMD 12.40% 4.65% 1.12% 6.00% 1.14% 0.00% 3.05% 3.16% 1.65% 2.49% 3.45% 2.04% 3.50% 3.00% 2.00% Commodity 2.90% 4.50% 3.32% Property 1.54% 3.68% 3.14% Private Equity 0.35% 1.10% 1.24% Cash 5.37% 2.65% 0.27% HSBC World Index Portfolios Fees ISIN Cautious Balanced Dynamic Lower risk solution with around 70% in fixed income, 20% in equities, 5% in alternatives and 5% in cash. Medium risk solution with around 55% in equities, 35% in fixed income, and the remainder in alternatives and cash. Higher risk solution with around 73% in equities, 19% in fixed income and the rest in alternatives and cash. AMC 0.25% C Acc: GB00B84DV184 *OCF 0.75% C Inc: GB00B84L8664 Reg fee 0.10% AMC 0.25% C Acc: GB00B76WP695 *OCF 0.72% C Inc: GB00B7PHDP01 Reg fee 0.10% AMC 0.25% C Acc: GB00B849DT80 *OCF 0.73% C Inc: GB00B7NM4986 Reg fee 0.10% *OCF - On-going Charges, estimated as at 1st November 2012 3
Well-diversified portfolios for three distinct risk profiles At HSBC Global Asset Management, we want to make investment decisions simpler for clients. So our HSBC World Index Portfolios give investors the ability to choose a single fund that will give them comprehensive access to the world s financial markets. All they need to do is make one decision on their risk attitude once you have established your client s investment objectives. We have created three distinct portfolios which we believe have the potential to meet the risk/return needs of most investors. We undertook extensive consumer research to establish how many core investor segments there are as well as each segment s attitude to investment risk. The valuable insights we uncovered have been used to create these highly sophisticated multi-asset solutions, which we have fine-tuned to be closely aligned to consumers risk preferences. We implement our diversified investment strategy primarily by using index tracking funds. Where there isn t a suitable index fund, we use Exchange Traded Funds (ETFs). In the case of government bonds, we are using direct investments, as this is the most efficient way of implementing our desired exposure at present. To gain the best value for investors, we use HSBC index tracking funds where available, and a selection of other products from other hand-picked investment managers. You can see full details of the current portfolio holdings in the funds individual factsheets. Five reasons to consider HSBC World Index Portfolios 1. Expertise in asset allocation. Asset allocation modelling is a core competency of the multi-asset team. The HSBC tried and tested quantitative methodology is applied with a qualitative overview built into the process 2. Broadly diversified solution. All three portfolios are invested across developed and emerging markets. In addition, we do not just invest in traditional asset classes, we also invest in property, private equity, commodities and other non-traditional assets which are not always readily available for retail investors 3. Risk-targeted investment solution. To ensure your client s risk tolerance is not exceeded, we have a ready-made solution designed for three different risk profiles. Our multi-asset investment team has built the portfolios with what they consider is the right mix of asset classes to deliver optimum diversification, considering each portfolio s individual risk target. The three risk profiles are designed for each of the three core customer types: Cautious, Balanced and Dynamic investors 4. Regular rebalancing. The portfolios are rebalanced to their original target asset class weightings every three months. This helps ensure that your client s risk tolerance is not compromised as asset classes can perform differently over time. In addition, there is an annual review of the target asset allocations to ensure the portfolios remain in line with their long-term risk profiles 5. Cost effective delivery. Our underlying investment strategies are all passive, which makes them more cost effective. We use HSBC index tracking vehicles, where possible, as this is the most cost efficient way to obtain exposure. If there is no appropriate HSBC product, we use ETFs or sometimes direct security investments which may be more cost effective 4
How we manage the funds our process We have a rigorous process to ensure that only the most appropriate asset classes make it into the HSBC World Index Portfolios. This is a sophisticated process that uses advanced quantitative screening processes and analysis to ensure the optimum mix of investments for the three portfolios. Rebalancing / Review Investment universe Assessment of available asset classes Forward-looking returns for different asset classes Correlations between different asset classes, using historical data Single asset class risk, measured by historic volatility Asset Allocation Optimal long-term (5-10 years) portfolio structure (blend of asset classes, regions, currencies) for desired portfolio risk level Fulfilment Choose underlying investments, aiming for the most cost-efficient solution for each asset class held Quarterly: Rebalancing of portfolio to asset allocation target weights to ensure portfolio remains in line with risk budget Annually: Review of portfolio asset allocation, as correlations and return expectations may change over time Stress-testing of portfolio structure in about 3,000 different scenarios to ensure robustness, using a Monte Carlo simulation methodology see below Source: HSBC Global Asset Management, September 2012 Monte Carlo Simulation Monte Carlo Simulation is a class of computational algorithms that rely on repeated random sampling to compute their results. The process allows us to value and analyse complex portfolios by simulating the various sources of uncertainty affecting their value, and then determining their average value over the range of resultant outcomes. Therefore the Monte Carlo simulations enable the construction of stochastic financial models, as opposed to traditional methods that do not take into account that market conditions may change and returns may vary. By running the simulations, we can therefore stress-test our expected returns over different time periods, considering historic correlations and volatility. The process factors in the fact that actual asset class returns may be different from our return expectations and enables us to better understand each portfolio s behaviour in different market circumstances. Firstly we undertake a thorough assessment of the available asset classes. Next we use our in-house quant-based optimisation process to assess how the asset classes work together to deliver the best blend. We then identify the optimal long-term portfolio structure for the given risk tolerance. Finally, we select the best investments for each asset class regardless of the currency and have introduced a process of hedging non-sterling assets back into sterling in certain cases. We do this to eliminate unwanted currency risk, only entering into our positions on purpose and not be surprised by increased portfolio risk due to currency fluctuations. To ensure robustness of the structure we stress-test the portfolios in approximately 3000 different scenarios. 5
How we manage asset allocation Asset allocation is important, get your asset allocation wrong and any returns from your fund selection can be completely wiped out. Our approach to asset allocation emphasises targeting a realistic long-term real return after inflation, and which rewards investors for the risk being taking. Our asset allocation strategy relies on two principles: 1. From year to year, asset classes perform differently. 2. Diverse asset classes offer returns that are not perfectly correlated. The diagram on this page provides a visual insight into how asset classes deliver different returns from year to year. This underlines our view that asset allocation is critical to a successful investment strategy. Which asset will perform best each year? Best performing asset class in year 25.9 25.0 18.9 22.0 18.1 16.2 12.8 30.1 16.8 10.4 23.9 12.8 21.4 16.8 7.7 11.5 22.9 14.5 15.6 8.1 UK Government Bonds Property 10.2 20.9 12.3 19.8 14.3 6.1 7.0 18.9 14.5 6.9 UK Non-Government Bonds 9.5 11.2 9.1 18.8 4.7 5.6 5.0 10.8 9.5 6.0 Global Government Bonds 9.2 5.7 8.0 16.1 2.7 5.3-4.1 2.2 8.4 0.5 Cash 4.1 4.4 6.7 9.0 2.1 5.3-22.5 1.3 7.6-3.5 UK Equities -8.8 3.8 6.6 7.9 0.7 4.0-29.9 0.8 7.2-5.2 Hedge Fund of Funds* Worst performing asset class in year -22.7 2.1 4.4 6.6 0.7 1.8 35.6 0.6 3.6-7.9-23.3 0.8-0.5 4.8-2.0-5.5-40.3-1.2 0.5 13.3 02 03 04 05 06 07 08 09 10 11 Year Global Equities Commodities Source: Bloomberg, data as at 31 December 2011, total returns in GBP. Indices to represent each asset class shown are: Bank of England Base Rate (Cash); FTSE All Stocks (UK Government Bonds); FTSE All Share (UK Equities); MSCI World (Global Equities); HFRI Fof Composite Index (Hedge Fund of Funds); Dow Jones Commodity (Commodities); Citigroup World Government Bond Index (Global Government Bonds); Market iboxx Non Gilt Index (UK Non-Govt Bonds); IPD UK Commercial Property Index (Commercial Property) Where appropriate we can efficiently gain access to non-sterling assets by hedging back into sterling. 6
Efficient asset allocation delivers a better risk and reward Asset allocation has a significant impact on the potential for a diversified portfolio to achieve its objectives within a managed spectrum of risk. There is a fine balancing act to perform in terms of the number of asset classes to include in a fund of this nature. The finessing of a multi-asset allocation model is as much an art as it is a science. The number of asset classes is one important factor but so too is the correlation of asset classes with each other. Using only asset classes that are closely correlated can even increase the risk of the portfolio without incrementally increasing the potential return. Therefore, a strategy should not be judged purely on the number of asset classes it holds, but rather on how those asset classes interact with each other. We have, therefore, constructed the portfolios using what we believe is the correct number of asset classes to deliver the optimum potential upside for the minimum amount of risk. That s why we think our HSBC World Index Portfolios are an efficient investment choice. Clever asset Reward HSBC World Index Dynamic allocation can HSBC World Index Balanced increase expected HSBC World Index Cautious x x returns without increasing risk HSBC World Index Portfolios by lifting the efficient frontier Equity/Bonds Portfolios x Cautious Balanced Dynamic Risk Source: HSBC Global Asset Management. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. For illustration purpose only. We blend asset classes to achieve two goals: to reduce unnecessary, unrewarded and unacceptable risks; and benefit from long-term returns for a given level of risk. To keep the portfolios in line with their agreed risk levels, we review our asset allocation target weights at least annually. We do this because expected returns and correlations between asset classes, for example, may change over time. 7
Contact our UK sales team for more information: Email: adviser.services@hsbc.com or Free phone: 0800 181 890 World Index. One World. One Investment This document is intended for Professional Clients only and should not be distributed to or relied upon by Retail Clients. The views expressed above were held at the time of preparation and are subject to 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 to meet such forecast, projection or target. The HSBC World Index Cautious Portfolio, the HSBC World Index Balanced Portfolio and the HSBC World Index Dynamic Portfolio are sub-funds of HSBC OpenFunds, an Open Ended Investment Company that is authorised in the UK by the Financial Services Authority. The Authorised Corporate Director and Investment Manager is HSBC Global Asset Management (UK) Limited. All applications are made on the basis of the HSBC OpenFunds prospectus, Key Investor 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 distributors. Investors and potential investors 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 investors 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 to fluctuate. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Stockmarket investments should be viewed as a medium to long term investment and should be held for at least five years. Any performance information shown refers to the past and should not be seen as an indication of future returns. The performance and value of bonds, gilts and other fixed interest securities may be affected by interest rate fluctuations and by changes in the credit ratings of the issuer. To help improve our service and in the interests of security we may record and/or monitor your communication with us. HSBC Global Asset Management (UK) Limited provides information to 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 who are authorised and regulated by the Financial Services Authority. Copyright HSBC Global Asset Management (UK) Limited 2012. All rights reserved. 23161/AS/1212/FP12-1859 8