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For professional clients only
HSBC World Index PortfoliosA range of multi-asset passive portfolios
World Index. One World. One InvestmentDecember 2012
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` 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
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.
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.
` 1. Passive investing offers a
cost-efficient way to access
global opportunities.
` 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.
Persistence of skill – active managers outperforming their respective benchmarks in consecutive years.*
S&P 500
45.30% 43.86% 42.48%
3 Yrs
FTSE All Share
41.98% 38.92% 37.93%
MSCI Emerging Markets
40.48% 35.71% 33.60%
1 Yr 2 Yrs 3 Yrs1 Yr 2 Yrs 3 Yrs1 Yr 2 Yrs
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:
The bottom line is investors and regulators are increasingly demanding value for money.
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
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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 Fees ISIN
Cautious Lower risk solution with around 70% in fixed income, 20% in equities, 5% in alternatives and 5% in cash.
AMC 0.25% C Acc: GB00B84DV184
*OCF 0.75% C Inc: GB00B84L8664
Reg fee 0.10%
Balanced Medium risk solution with around 55% in equities, 35% in fixed income, and the remainder in alternatives and cash.
AMC 0.25% C Acc: GB00B76WP695
*OCF 0.72% C Inc: GB00B7PHDP01
Reg fee 0.10%
Dynamic Higher risk solution with around 73% in equities, 19% in fixed income and the rest in alternatives and cash.
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
HSBC World Index Portfolios at a glance
Cautious Balanced Dynamic
US Equity (hedged in GBP)
4.90% 12.36% 14.91%
Europe (hedged in GBP)
4.26% 11.02% 15.71%
UK Equity 5.28% 12.34% 15.85%
Japan Equity (hedged in GBP)
2.81% 6.08% 4.91%
Asia Pac ex-Japan Equity
0.65% 3.30% 8.74%
Global Emerging Market Equity
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
12.40% 4.65% 1.12%
UK Inflation Linked Bonds
6.00% 1.14% 0.00%
Global High Yield Bonds
3.05% 3.16% 1.65%
Global Emerging Market Debt
2.49% 3.45% 2.04%
Global Local Currency EMD
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 Cautious
HSBC World Index Balanced
HSBC World Index Dynamic
Cautious Balanced DynamicCautious Balanced DynamicCautious Balanced Dynamic
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.
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
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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
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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.
` 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.
` To ensure robustness of the structure we stress-test the
portfolios in approximately 3000 different scenarios.
` 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.
Rebalancing / Review
Asset AllocationOptimal long-term (5-10 years) portfolio structure (blend of asset classes, regions, currencies) for desired portfolio risk level
Forward-looking returns for different asset classes
Correlations between different asset classes, using historical data
Single asset class risk, measured by historic volatility
Investment universe
Assessment of available asset classes
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
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.
Source: HSBC Global Asset Management, September 2012
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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?
Where appropriate we can efficiently gain access to non-sterling assets by hedging back into sterling.
Global Government Bonds
UK Equities
UK Government Bonds
Property
Commodities
Cash
UK Non-Government Bonds
Global Equities
Hedge Fund of Funds*
25.9 22.0 16.2 30.1 16.8
23.9 12.8 21.4 16.8 14.5
20.9 18.9
9.1
5.3
2.1
-22.7 35.6
-3.5
13.3
-29.9
-22.5
18.9 18.1
10.4
14.5
18.811.2
2.2
-5.5
8.1
25.0 12.8
11.5 22.9
10.2 12.3 19.8 14.3
7.7
7.0
9.5
6.1
5.0 9.5
9.2 8.0 16.1
4.7 5.6 10.8
8.4
4.1
5.7
9.0
2.7 -4.1
7.64.4 6.7 5.3 1.3
2.1 4.4 6.6 0.7 1.8 0.6 3.6
-23.3 0.8 -0.5 4.8 -2.0 -40.3 -1.2 0.5
15.6
6.9
6.0
0.5
-7.9
3.8 6.6 7.9 0.7 4.0 0.8 7.2 -5.2
Best performing asset classin year
Worst performing asset classin year
Year
‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11
-8.8
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)
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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.
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.
Clever asset
allocation can
increase expected
returns without
increasing risk
by lifting the
efficient frontier
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.
Risk
Reward
HSBC World Index Cautious
HSBC World Index Balanced
HSBC World Index Dynamic
Cautious Balanced Dynamic
x
x
x
HSBC World IndexPortfolios
Equity/BondsPortfolios
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World Index. One World. One Investment
Contact our UK sales team for more information:
Email: [email protected] or Free phone: 0800 181 890
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