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4 reasons why IFAs may want to engage with this fund house

Ravi Menon, CEO, HSBC Global Asset Management

23rd October 2017

In a nutshell

In the course of a candid conversation, Ravi Menon outlines four reasons why IFAs may want to consider engaging with HSBC AMC:

  1. Sound performance of its flagship equity product on the back of a clearly articulated investment philosophy which effectively straddles growth as well as valuation metrics
  2. Size and scale - contrary to popular belief of HSBC MF being a "small fund house from a big brand", the scale of money under management of the Indian team actually places the fund house at the 6th position in India
  3. A new sales leadership team in place with a clear mandate to step up IFA engagement and ensure consistently high levels of engagement, going forward
  4. A big push towards "globally enabling" IFA partners through sharing of global information and insights that can enable you to sharpen that dimension of your knowledge.

Read on to understand the new growth push from this global major and consider how you might want to leverage their products and propositions.

WF: Distributors recall the initial glory days of HSBC MF but wonder whether the firm has perhaps lost focus somewhere down the line. The key concern now in distributor minds is about size - whether the Group is really interested in running a domestic MF business in India at its current size and whether therefore it is a good idea to recommend funds in an AMC that lacks scale to become a serious competitor. How would you respond to these concerns?

Ravi: I think there are 3 parts to this, and let me address each one of them:

Longevity: In sharp contrast to several of our global competitors who came to India and exited, HSBC, with over 150 years of unbroken presence in India is by far the longest standing financial services player in India, across all forms of ownership. We have been managing India dedicated funds for over 21 years now and our domestic Indian asset management business is now close to 15 years old. So, in terms of orientation, we are not a Group that looks at opportunities from a 5-10 year perspective - we think genuinely long term.

Size: We are actually much bigger than you perhaps think. If you add up the domestic MF business, the offshore funds that we have an advisory mandate for and our PMS business, we manage around US$ 23 billion in total India assets. That really puts us at the No 6 position in India among fund houses.

Products: Our flagship large cap equity fund has been ranked among the top 3 in terms of consistent long term performance by reputed independent research firms, and we believe this is a result of strong execution of a well-articulated investment philosophy.

Globally, HSBC manages over US$ 450 Bn in assets, placing us among the top 25 asset managers in the world. The asset management business globally as well as in India is a core component of a holistic suite of services we offer our customers including banking, insurance, fund management, broking, investment banking and so on.

HSBC Global Asset Management's growth strategy for the coming years has a strong pivot to Asia, and within Asia, its China and India that are right on top in terms of potential and focus.

That said, I guess if you asked this question, there is somewhere a perception or misconceptions about HSBC AMC. In all fairness we should have been perhaps more distribution focussed. We were perhaps more performance focussed and were harmonizing our fund management processes with our global process and making sure we have our manufacturing capabilities fully aligned with Group investment philosophy. I am pleased to advise that this has really borne fruit, if you see our fund performance over the last 3 years.

We now have a new sales leadership team in place and our mandate is very growth focused, we have solid fund performance to back our brand and credentials, and we have begun engaging earnestly with our distribution partners.

WF: You talked about fund performance of your flagship equity funds - what is your fund house's core investment philosophy and process that has been driving performance in recent years?

Ravi Menon: Any good quality fund house will want to articulate a clear investment philosophy, institutionalize processes that are consistent with that philosophy and communicate that process in a clear and easy to understand language both for our distributors and investors whilst ensuring that we don't over-emphasize individualistic approaches to fund management. That's easier said than done, but I am happy to share that we have been able to do this across our product range, which I believe is at the heart of our performance.

We have adopted at a global level, a proprietary model that leverages the profitability vs Valuation model based on PB/RoE framework. The research that has gone into developing this framework is quite phenomenal really. Let me take an example of how we apply this in our business: take the mid and small cap segment. 6000+ listed entities from diverse sectors, myriad research reports on many, little coverage on some. Where do you start creating your universe of stocks? What our framework does is to rank all these companies on the basis of their profitability (as reflected by Return on Equity) as well as valuation (Price/book) to come up with an initial list of businesses that rank high on profitability and relatively low on valuation.

WF: Does the use of P/B suggest an inherent value bias in your philosophy?

Ravi: You could say that, but I would caveat it since the PB-RoE framework is the starting point and not the final list of stocks selected. The framework gives our fund managers a useful narrowed-down universe of stocks that meet our basic criteria on profitability and valuation - from which they will choose stocks that they think are best suited to deliver against the mandate of each fund they manage. The stocks they may choose may be growth oriented, they could be value plays - but what the framework does is put an important quality filter to create a universe of acceptable businesses for our fund managers to work with. What the framework does is to cut out random selection based purely on sentiment or momentum. It is also important to remember that it is a relative value framework. We are not essentially looking for absolute value but cheaper stocks given the same level of profitability across a set of stocks.

We have been using this framework in India for around 4 years and the results are very gratifying - in terms of performance as well as the manner in which performance is being delivered. We have been able to strike the right balance between allowing fund manager flair but within a sound, objective framework, which promotes consistent and predictable delivery of performance. It's not a framework built to shoot the daylights out of a short term performance league table - rather, it is a framework that is geared to deliver superior long term performance on a consistent basis.

WF: When you look back over the last 3 years which have been great for the industry, what would you say have been the hits and misses for your fund house?

Ravi: I think the improvement in our fund performance and the consistency of our performance on the back of adoption of our investment philosophy is one of the key wins for us - because this is at the core of all our growth plans. You need to have sound performance and a strong basis to believe in its consistency, before you can go our aggressively in the market place with your growth plans. 100% of our equity funds have beaten their benchmarks. Our large cap and multi-cap have on a rolling return basis, beaten category averages 95% of the times while for the midcap fund, the number stands around 85%. We have a competent and tenured investments team in place which we believe will enable us to continue delivering consistent performance in the years ahead.

The other key initiative for us was the launch of our Managed Solutions product in 2014, which we believe is one of the few if not the only genuinely multi-asset product in the Indian market. Multi-asset is a global capability at HSBC, that deep dives into asset classes across the globe, understands their interlinkages and thus drives asset allocation decisions in our multi-asset product. The focus here again is to cut out individualistic biases on asset allocation and instead harness global insights into the product. In the 3 years since its launch, we have seen different hues of business cycles and the product has delivered very well by aligning its asset allocation suitably.

The third aspect is much ahead of regulatory directives, we have cleaned up our product suite into a compact suite of well-defined products. We have among the smallest range of products - not because of manufacturing capacity constraints - but because we wanted to have well defined products with no overlaps that might confuse investors.

What we could have done better is clearly the external engagement - in terms of engaging with distributors and communicating our philosophy and performance. We've got a good team in place now for that and we have begun engaging in right earnest, not just with distributors but also with media.

WF: What is your distribution strategy? Are you looking at expanding your IFA engagement?

Ravi: We have 4 key distribution channels: The first is our Bank - they run an open architecture model and we engage with them just as any other fund house does. The second is banks and NDs. The third is the IFA segment and IFA platforms. And the 4th is the emerging space of online platforms. Of the lot, the segment we really need to step up our engagement is the IFA space. I am really encouraged to see many IFAs who have been with us from the beginning, have continued to advice their clients to remain invested in our funds on the back of sound performance, even during the phase when our engagement weakened. They are truly aligned with their clients' best interests and we would want to engage much closer with them.

IFA engagement for us will not be confined only to more meetings and information sharing, which will be done in any case. Where we would really like to add incremental value to them is to become their knowledge partners on global markets. We are living in a globally connected world and events outside of our shores materially impact our markets as well. As a global brand with fund management capabilities across the world, we have rich insights and perspectives on global markets which we will be keen to share with our IFA partners, to enable them to sharpen that dimension of their knowledge.

WF: Looking ahead over the next 5 years, how would you like to position and steer your fund house? What would you like HSBC MF to be known for, 5 years from now?

Ravi: We aim to become the preferred asset manager for our client set. Setting targets on size and scale to me are meaningless - they are just outcomes. That happens only when you get one core aspect right - which is that your products must be of consistently high quality, must preserve the sanctity of their mandates and must deliver consistent performance over the long term. When you focus your energies on achieving this, you will become a preferred asset manager for your client set, and when you achieve that, size and scale are the outcome.

WF: What can distributors look forward to from HSBC MF in terms of products, engagement and business development support?

Ravi: Consistent high quality engagement is what distributors and partners can now look forward to from us. In terms of products, we will be keen to bring in cross-border products that are relevant to our investors. We will also look at expanding our offerings in the PMS and alternatives space to complement our mutual fund products.

Technology is the backbone for business development and we aim to invest appropriately in technology to enable us to engage more meaningfully with our distributors and provide them with relevant inputs that supports their business growth. And as I mentioned, we are keen to become a knowledge partner for them on global markets, which I believe can give them useful insights that can enable them to guide their clients better in this hyper-connected world.

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