HSBC Asset Management (India) has described take-up of its new Brazil equity fund as encouraging as it seeks to test investor interest for future diversification plays.
The HSBC Brazil Fund is a fund-of-funds scheme that invests in the Brazil Equity Fund within HSBC Global Investment Funds. It is exclusively distributed through its retail bank, largely targeting high-net-worth individuals.
Puneet Chaddha, CEO of HSBC Asset Management in India, says a proliferation of domestic offerings in India has created demand for diversification, but not at the risk of sacrificing return.
“In India we have seen diversification across asset classes and a lot of thematic offerings,” he says, “but everything is within the four walls of India. We picked Brazil because it is an emerging market story and a growth story.
“There is concern in India about how we are going to tackle the rapidly increasing oil prices. But if you look at Brazil, it is largely self-reliant for its energy requirements, so it becomes a natural hedge.”
However, a single-country focus is not as diversified as a broader emerging markets focus, and it is noticeable that the HSBC Emerging Markets Fund has returned -0.22% in the past three years.
Further, while the HGIF Brazil Equity Fund has returned around 18% in the past year, beating 12.4% for the MSCI Brazil Index, over a three-year period it has lost about 1.8%.
Chaddha sees the risks of investing in Brazil as mainly political, and mentions the danger of margin calls in the event of investments turning sour elsewhere.
“Yes, there is a three-year returns history that we need to shrug and we are sharing that objectively with customers,” he states. “But we cannot ignore the last one-year’s performance. The Brazilian government very tightly controls the kind of equity inflows it gets, so you do not have excessive foreign portfolio investment in Brazil.”
The Brazil fund is HSBC India’s 10th equity offering and only its second non-domestic product. But Chaddha thinks domestic investors are happy to diversify provided they don’t sacrifice returns. Over the past 10 years India’s equity market has returned 15% on average compared with 17% for Brazil, he says.
Promoting the investment opportunity, he notes the country has 12% of the world’s fresh water resources and is the largest producer of sugar. Brazil is also set to host the Football World Cup in 2014 and the Olympic Games two years later.
“If you look at various emerging market countries that have hosted big world sporting events, they have seen acceleration in infrastructure investment, which has had a very positive impact on their capital markets,” he states.
“There is a lot of confidence in the Brazilian economy, and while infrastructure is a challenge there currently, there is an argument that as that improves you are going to see a lot of outperformance, which is why we have the confidence of taking a larger equity bet.”
He adds that nearly 30% of Brazil’s GDP is derived in and around Sao Paolo and Rio de Janeiro – the two centres most likely to receive maximum infrastructure investment.
The Brazil fund will invest in at least 95% equities, while the charges are 2.5%, with no entry load and an exit load of 1% if investors redeem within 12 months.
Chaddha says HSBC has already collected “the minimum amount we were expecting to”, which he declines to reveal.
Asked whether HSBC India might look to launch more funds with an ex-India focus, he adds: “Seeing the buzz from the distribution arm, I think people are going to ask us for more such opportunities, because clearly this is a market segment which customers are going to focus on.
“Already people are suggesting we should do a Russia fund, or a country-specific fund. We will look at that once we have fully digested the response to the HSBC Brazil Fund.”
HSBC India currently has a universe of 18 funds, and Chaddha, who only took up his role as CEO recently, is examining options to consolidate funds, particularly on the debt side.