Light, medium or strong? Different solutions for different needs HSBC Managed Solutions (An open ended Fund of Funds Scheme) A need-based investment solution that helps you meet your financial goals New Fund Offer: 09 April to 23 April 2014
Why invest?
Changing social demographics Increasing life expectancy Survive longer on Work life savings Stressful work environment Early Retirement & sabbaticals Rising health care cost Old age is not covered Nuclear families Reduction in family & social security Post retirement income Its your investments turn to earn Increased income but is it enough to cater for your post retirement needs? 3
Greater demand to spend Emergencies? Children s Marriage Retirement Support old parents Children Car House Children s Education Do you want to compromise on your living standard after your retirement? Marriage Savings / Investing 0 Birth and 25 Earning Life 60 Education Age Retired Life 75 + Source: HSBC Global Asset Management 4
High focus towards perceived safe investment avenues Asset Class Distribution : Individual Wealth Asset Class Performance* Source : Reserve Bank of India, Currency - INR Expected average savings for 12th Five Year Plan (2012-17) Period : 1989 2012, Source : CLSA, Currency INR *Real Estate data not available 5
Just saving is not enough: You also have to beat inflation! If you manage your monthly expenses with INR 100,000 today, and if inflation grows @ 8% or @10%, what will you need in future? How Inflation erodes our money value? INR 100,000 in last 34 years (since inception of S&P BSE Sensex): If left idle (cash)= ~INR 7,661 If invested in Fixed Deposits = ~INR 146,273 If invested in EPF = ~INR 209,775 If invested in Sensex = ~INR 1,428,287 Sensex has historically provided higher returns Is your money working hard enough to sustain you? Source : BSE, RBI, EPFO website, Currency - INR 6
Why invest - Takeaways Inflation : A real threat Prepare for retirement while we earn and more importantly while we can Enhance our purchasing power instead of protecting current value 7
Where to invest?
Alternative Investments: Means to diversify Gold: Allocate in moderation Can be volatile Real Estate Project delays Title issues Liquidity concerns Commodities: Regulations still evolving Not fully understood by retail investors So how do we go about investing? 9
Equities Different perspectives It is too risky Led by Foreign Institutional Investors (FII) and speculators We have lost money in equities We have not seen the markets provide positive returns over last 5 years Equities are a game changer It is an asset class for the long term Historically, equities have provided 15.4% compounded annualised returns better than other asset classes (Source: CLSA: 1989-2012, Currency - INR) Both are right! 10
Growth values, Rebased at 100 Mar-89 Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 The unconventional truth Over the longer term growth in equities track the corporate earnings growth BSE Sensex - Profit growth versus Index growth 4,000 3,000 2,000 1,000 - EPS Growth Sensex Growth Source: BSE Website, Currency - INR Equities track corporate earnings EPS : Earnings Per Share The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. 11
You need to give it time Likelihood of loss versus duration of investment 0% Analysis based on Sensex data since March 1979, as on March 2013, Currency - INR Source: BSE, HSBC Global Asset Management, India Time in market more important than timing the market 12
Where is the disconnect? Investor returns depend more on Investor behaviour and risk profile rather than the market behaviour Performance chasing syndrome? Buy the best performing asset class The best performing stock The best performing fund 13
Let us consider the best performing markets Country Equity Performance UK UK Better Performing UK UK UK UK UK Source: Bloomberg UK Worser Performing 14
Or the best performing sectors? Top 2 Equity Indices/Sectors Year and Market Cap performance Top 2 Sector Next Year Ranking for Top 2 Sectors Calendar Year NSE - NIFTY 50 NSE - CNX Mid cap No 1 No 2 No 1 No 2 2003 72% 138% Metal - 212% Capital Goods - 168% 7/11 3/11 2004 11% 25% Teck - 33% Bankex - 33% 6/11 8/11 2005 36% 35% Consumer Durables - 115% Capital Goods - 94% 12/12 1/12 2006 40% 29% Capital Goods - 56% Teck - 49% 3/12 10/12 2007 55% 77% Power - 122% Metal - 121% 9/13 12/13 2008-52% -59% FMCG -14% Health Care -33% 13/13 11/13 2009 76% 99% Metal - 234% Auto - 204% 10/13 2/13 2010 18% 19% Consumer Durables - 68% Auto - 38% 5/13 6/13 2011-25% -31% FMCG - 10% Health Care -13% 3/13 6/13 2012 28% 39% Bankex - 57% Realty - 53% 7/13 13/13 2013 6.80% -5% IT - 60% Healthcare - 22.6% Themes change - Different sectors and segments perform at different times! Source: Bloomberg, Currency - INR Teck indicates Technology Index, FMCG indicates Fast Moving Consumer Goods Index, Bankex indicates Banking Index, IT indicates Information technology Index 15
Returns The hypothesis also holds true for different investment categories The best category changes every year Midcap equity Midcap equity Large cap equity Midcap equity Midcap equity Long term debt Ultra short term debt Ultra short term debt Long term debt Ultra short term debt The best performing category for the year Do we place enough importance on asset allocation? Source: MFIE, CRISIL, Currency - INR Note: Large cap denoted by S&P Nifty, Midcap denoted by BSE Midcap, Long term debt denoted by Crisil 10 year Gilt Index, Short term debt denoted by Crisil 1 year T-bill index and Ultra Short term debt denoted by Crisil 91 day T-bill index; Diversification of portfolio is customer's choice 16
Is there a solution that we can consider?
Asset allocation: Key determinant of portfolio returns Factors that explain variation between portfolio performances Most time spent on the 6% viz. security selection, market timing Source: Brinson et al, 1986 18
Why should we consider multi-asset portfolios? Multi-asset portfolios spread investments both across asset classes and across geographies Ensures that the portfolio does not become over-reliant on a single asset class or a single country or sector Asset classes typically have a low correlation - combining assets with low correlations helps reduce overall portfolio volatility Low Correlation between various investment segments (2003-14) Correlation Coefficient Large Cap Long Term Debt Midcap Short Term Debt Offshore Equity Gold Large Cap 1.00 0.22 0.89 0.17 0.45-0.01 Long Term Debt 0.22 1.00 0.25 0.89 0.03-0.02 Midcap 0.89 0.25 1.00 0.17 0.45 0.03 Short Term Debt 0.17 0.89 0.17 1.00-0.02 0.03 Offshore Equity 0.45 0.03 0.45-0.02 1.00 0.02 Gold -0.01-0.02 0.03 0.03 0.02 1.00 Large Cap denoted by BSE Sensex, Long Term Debt denoted by CRISIL Composite Bond Fund Index, Mid cap denoted by BSE Midcap Index, Short Term Debt denoted by CRISIL Short Term Bond Fund Index, Offshore Equity denoted by MSCI World Index Period : 1 April 2003 to 31 January 2014, Source: CRISIL, BSE, Bloomberg 19
Illustration Asset allocation may help optimise returns and risk Combining two asset classes with low correlations could produce a portfolio with reduced overall risk, while improving risk-adjusted returns over a market cycle The lower the correlation between two assets, the greater the diversification effect Return Asset A Portfolio 20% Asset A 80% Asset B Asset B Risk Asset Return Volatility Sharpe Ratio Asset A 12.0% 25.0% 0.48 Asset B 5.0% 10.0% 0.50 Portfolio 6.4% 8.0% 0.80 Source: HSBC Global Asset Management For illustrative purposes only, Assuming the risk free rate is 0% Sharpe Ratio - A ratio used to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. Volatility - A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. 20
Is asset allocation enough? Case for re-balancing Rebalancing an investment portfolio endeavours that you sell high and buy low in the process of maintaining the desired composition of your portfolio at pre-decided periodicities. For example If the preferred asset allocation for an individual is Debt-Equity-Liquid at 50:35:15 Let us assume that equity markets generate 20% in a particular year, bond markets generate 10% and liquid investments generate 6%. What happens to investor s portfolio if he rebalances annually Initial Investment 35% 15% 50% Assumed Equities up 20%, Bonds up 10% and Liquid up 6% Change in Asset Allocation after 1 year due to market movement 33.65% 13.89% 52.45% Asset Allocation restored after rebalancing 35% 15% 50% Equities Debt Liquid Remains true to investment objective! 21
Can we dynamically allocate assets in keeping with the investment objective?
HSBC Managed Solutions
HSBC Managed Solutions: A wealth imperative Multi asset (Domestic and Offshore Equity, Fixed Income, Liquid and Gold) portfolios which are actively managed Constructed to optimize returns whilst managing risk Offers transactional efficiency to the investor A unique investment solution for Indian investors 24
HSBC Managed Solutions An Investment Solution Designed to meet the needs and preferences of investors Considers investors' risk profile and deliver solutions to meet investment goals Uses active asset allocation to achieve optimal mix Fund of Funds (FOF) feeding into HSBC/Third Party funds* Merits Risk Profile based Asset allocation Buckets Supports long term Goal Based Investment Planning Risk aware investment experience matched to customer needs Diversifying across low correlation asset classes Domestic Equities, Domestic Bonds, Offshore Equities, Alternates (like Gold) Delivered through open-ended funds in the cost efficient manner, to deliver an efficient investment solution Regular allocation reviews Quarterly and event based, annual comprehensive review of design principles Low Cost Solution Free switching & Withdrawal benefits Expenses with customer value proposition intent Investors can reap the benefits of asset allocation based on risk profile without having to select funds or personally rebalance the portfolio * For capabilities where HSBC offerings are not available 25
Managed Solutions - Options Seeks to provide long term total return through active asset allocation Managed Solutions India Growth Primarily invests in equities, with diversification in debt, gold and liquid Managed Solutions India Moderate Primarily invests in equities and debt, with diversification in gold and liquid Managed Solutions India Conservative Primarily invests in debt, with diversification in equities, gold and liquid 26
Asset allocation bands Plan Type of Security Equity Schemes (Units of Domestic Equity and Offshore Equity) Indicative Allocation (% of net assets) Risk Profile Minimum Maximum 55% 90% High Managed Solutions India Growth Debt Schemes 10% 30% Low to Medium Gold and Other Exchange Traded Funds 0% 15% Medium to High Money Market Schemes/Liquid Funds (including up to 5% in Money Market Instruments) Equity Schemes (Unit of Domestic Equity and Offshore Equity) 0% 20% Low 30% 70% High Managed Solutions India Moderate Debt Schemes 30% 70% Low to Medium Gold and Other Exchange Traded Funds 0% 15% Medium to High Money Market Schemes/Liquid Funds (including up to 5% in Money Market Instruments) 0% 25% Low Equity Schemes (Unit of Domestic Equity) 0% 15% High Managed Solutions India Conservative Debt Schemes 55% 100% Low to Medium Gold and Other Exchange Traded Funds 0% 5% Medium to High Money Market Schemes/Liquid Funds (including upto 5% in Money Market Instruments) 0% 25% Low to Medium 27
Key risks Operational Risk: Given that the Fund of Funds structure will involve splitting each subscription and redemption at Fund of Funds level into multiple subscription and redemptions into the respective funds; there is enhanced operational risk Liquidity risk of underlying instruments: There could be liquidity risk on account of illiquid underlying holdings Market Risk: The Underlying scheme s investments are subject to the risks inherent in all investments in Securities i.e. the value of holdings may fall as well as rise Currency Risk: As the Underlying scheme could invest in securities which are denominated in foreign currencies (e.g. US Dollars), fluctuations in the exchange rates of these foreign currencies may have an impact on the income and value of the Scheme. Restructuring/Rescheduling Risk: There could be cases of restructuring/rescheduling of particular debt/money market instruments held in the portfolio which could result in the maturity of these instruments going beyond the original maturity date of the instrument Risk factors associated with investing in Gold Exchange Traded Funds Risk factors associated with Legal, Tax and Regulatory risk 28
Why HSBC Global Asset Management?
HSBC Global Asset Management: Credentials Expertise in managing Indian equity and debt One of the largest managers/sub-advisors of Indian assets Equities - ~ USD 3.2 B* Fixed income ~ USD 13.4 B* Only foreign asset manager of the largest provident fund mandate in India Multi-asset: A leading global player Significant proportion of AUM globally USD 73.9 billion assets under management in multi assets # A core global capability International perspective Ability to identify and position for global trends Long term asset prices Impact of macro economic developments # Source: HSBC Global Asset Management as at 31 December 2013. Any differences are due to rounding. *Source: HSBC Global Asset Management; AUM data as on 28 February 2014, USD/INR 61.755 30
HSBC Global Asset Management: Credentials We are committed to being: Fair to our clients Provide them world class solutions that are: Sustainable Fairly priced We believe this is our competitive advantage 31
HSBC Global Asset Management: Credentials We were and probably are the only Asset Management Company (AMC) in India to have waived exit loads from all our mutual fund schemes w.e.f. March 2013 In 2013, we were amongst the fastest growing AMCs in India (Domestic mutual fund average assets growth in 2013) Source: AMFI 32
Make the right choice There is a simple, straightforward way to create long term wealth Understand and embrace risk Put time on your side and don t try timing the market Invest regularly Follow asset allocation & rebalancing discipline Asset allocation and rebalancing is the key 33
For further information on HSBC Managed Solutions, please contact your Investment Advisor
Product labeling Managed Solutions India Growth Managed Solutions India Moderate Managed Solutions India Conservative This product is suitable for investors who are seeking*: To create wealth over the long-term Investing predominantly in units of equity mutual funds as well as in a basket of debt mutual funds, gold & exchange traded funds, offshore mutual funds and money market instruments High risk (BROWN) This product is suitable for investors who are seeking*: To create wealth and provide income over the long-term Investments in a basket of debt mutual funds, equity mutual funds, gold & exchange traded funds, offshore mutual funds and money market instruments Medium risk (YELLOW) This product is suitable for investors who are seeking*: To provide income over the long-term Investing predominantly in units of debt mutual funds as well as in a basket of equity mutual funds, gold & other exchange traded funds and money market instruments Medium risk (YELLOW) * Investors should consult their financial advisers if in doubt about whether the product is suitable for them. Note: Risk may be represented as: (BLUE) investors understand that their principal will be at low risk (YELLOW) investors understand that their principal will be at medium risk (BROWN) investors understand that their principal will be at high risk Risk categorisations as per regulatory guidelines 35
Disclaimer This document has been prepared by HSBC Asset Management (India) Private Limited (HSBC) for information purposes only and should not be construed as an offer or solicitation of an offer for purchase of any of the funds of HSBC Mutual Fund. All information contained in this document (including that sourced from third parties), is obtained from sources, which HSBC/ third party, believes to be reliable but which it has not independently verified by HSBC/ the third party. Further, HSBC/ the third party makes no guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy or completeness of such information. The information and opinions contained within the document are based upon publicly available information and rates of taxation applicable at the time of publication, which are subject to change from time to time. Expressions of opinion are those of HSBC only and are subject to change without notice. It does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies that may have been discussed or recommended in this report and should understand that the views regarding future prospects may or may not be realized. Neither this document nor the units of HSBC Mutual Fund have been registered in any jurisdiction. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions. Copyright. HSBC Asset Management (India) Private Limited 2014, ALL RIGHTS RESERVED. HSBC Asset Management (India) Private Limited, 16, V.N. Road, Fort, Mumbai-400001 Email: hsbcmf@hsbc.co.in Mutual fund investments are subject to market risks, read all scheme related documents carefully. 36