As managed funds have failed to evolve over the last 10 years, HSBC Investments redresses the balance with its OpenFunds range, and identifies an opportunity to both modernise and simplify the concept
As advisers, you have at your disposal an increasingly vast array of investment options through the platforms, but are you being offered real choice or simply the illusion of choice? Are funds competing in an overcrowded space? If investment advice isn't central to your business, you still have the option of falling back on managed funds to achieve diversification for your clients. Peace of mind, right? Wrong.
Access and the tools have improved but the investments are the same
Distribution platforms have improved access to funds. Selection tools have provided better quantitative back-up for portfolio construction. Qualitative characteristics of the funds available to advisers, however, have not changed significantly. This is particularly evident as financial markets have evolved in recent years, changing the investment landscape forever
l There are simply more asset classes available today. Equities and bonds are by no means the only places to invest.
l Financial markets have become increasingly global. The best investment talent is not necessarily available through UK registered funds.
l Client attitudes to risk have changed as a result of market volatility. There is increasing demand for absolute rather than relative returns.
It remains tough, due to these factors, for advisers to create truly diversified portfolios. Only through combining uncorrelated asset classes can the consistency of returns from a portfolio be improved and therefore provide some insulation from setbacks in individual markets be gained.
Diversification is critical. History tells us that no single asset performs consistently well over time.
Diversification is nice in theory, difficult to achieve in practice
It is possible to create a portfolio of equity and bond funds, and in doing so diversify the risks associated with specific fund managers and investment styles. The UK universe of funds does, however, encompass some world-class boutique and institutional investment managers. Unfortunately, these managers still aren't accessible to advisers.
More significant barriers in managing the risks facing clients, however, are geographical biases and focusing on a limited number of asset types. The emphasis on UK equities and bonds in most portfolios shows relative, rather than absolute returns, remain the order of the day. This makes short-term volatility a factor for the vast majority of UK investors.
Managed funds replicate rather than challenge inherent biases
It is disappointing that managed fund investing has failed to evolve with the industry or financial markets over the last 5-10 years.
Not that long ago you needed a good reason to not have managed funds. Now, selecting a managed fund can be a minefield if making assumptions about what diversification it offers, whether you look at traditional 'cautious', 'balanced' or with-profits. The issue is benchmarks which have inherent bias towards equities and a focus on domestic assets, and managers who so tightly follow the benchmark as to be a closet index tracker. These are not solutions to the advisers' investment problem.
Multi-manager 'lite'
Among multi-managers these traditional biases remain. What advisers have access to is effectively multi-manager 'lite'. Multi-managers in the cautious/balanced managed sectors have, on average, a bias towards equities and bonds and the UK. These funds don't solve the problem for advisers; they are hugging UK-biased benchmarks like a security blanket and in the main are aiming for relative returns.
Compare these asset allocations with that of Yale University, a global thought leader with a formidable investment portfolio that is unbiased in its construction, spreading risk as widely as possible and placing an emphasis on long-term absolute returns.
This type of structure is no longer the exception to the rule and it is rapidly becoming a common position. Even in the UK, private wealth managers and institutional pension schemes have learned the lessons of the bear market and diversified into alternatives.
Modernising a concept that is as relevant today as ever
The managed fund concept is still relevant and in demand, but what is available looks dated. A modern solution is needed that suits the way advisers do business and that reinvigorates the managed fund concept by:
l moving to a multi asset class model with no bias towards equities and bonds;
l embracing an unconstrained global approach in preference to a UK bias; and
l provides UK advisers with access to global best in class investment talent.
Why make the effort?
Firstly, to create portfolios composed of uncorrelated assets which offer an expected return against the investor's return target. Secondly, to seek to control the risk for that given level of return.
A modern, managed fund should cover the entire spectrum, owning global equities, bonds and currency with well-diversified exposure to global property, private equity, hedge funds and other alternatives. These additional 'alternative' asset classes can offer real diversification benefits and potentially superior returns than traditional ones.
Introducing HSBC Investments' OpenFunds range
As an investment business with multi-manager at the heart of its proposition, HSBC Investments has taken these key factors and identified a real opportunity to both modernise and simplify the managed fund concept. The result is HSBC OpenFunds, a brand new concept specifically designed with financial advisers and their clients in mind.
These funds are modern solutions but with simple, relevant investment objectives. As core solutions, they are unbiased in their construction by geography or by asset class. There are two funds within the range at present. Both funds share a primary goal to preserve capital. Secondly, they seek to achieve consistent positive returns, irrespective of conditions in financial markets. Investments are geographically spread, with no specific bias towards the UK, and across a range of asset classes.
The HSBC Open Global Return Fund is designed primarily for investors seeking capital growth while the HSBC Open Global Distribution Fund targets investors seeking an income which is expected to rise moderately over time. As fund of funds, both offer all the generic benefits you would expect, such as hassle-free administration, consolidated reporting and trading within the fund which is both free of capital gains tax and cost efficient. The funds are based in the UK and both price and deal on a daily basis. They can be held inside and outside of an Individual Savings Account (Isa).
The emphasis on diversification and strategic asset allocation encourages consistency of returns and gives these 'fund of funds' multiple applications in the hands of a skilled adviser. Because these funds emphasise capital preservation and focus on encouraging consistency of returns, you may be able to apply them across your client base to encourage a degree of consistency in performance across your client accounts.
For more information on the potential applications of these new funds, or about our world class multi-manager team, please call your sales manager or visit www.hsbcinvestments.co.uk. Alternatively contact our Adviser Services Team on 0800 181 890*.
