HSBC is refocusing its geographic strategy onto regional equity funds and away from country-specific products as it sees a shift in investor demand.
As it announced a new Asia fund, the bank revealed a key regional fund had been enjoying strong inflows, boosting its faith in a shift away from a ‘home bias’.
Yesterday, the asset manager launched the offer period for its fourth regional equity fund, the HSBC Asia Pacific ex-Japan equity volatility focused fund.
To back up its confidence in the regional product strategy, head of Asian and Indian equities, Sanjiv Duggal, announced that HSBC’s core Asia ex-Japan fund last week witnessed its strongest inflows “for some time”, pushing up its AUM by 13%. The fund had an AUM worth $351 million at the end of February.
“Hopefully as the product matures there will also be demand from other regions for the fund,” said Pedro Bastos, HSBC Global Asset Management’s Hong Kong CEO and Asia Pacific head. He sees more investors allocating to Asia amid a declining home bias. “With time, home bias will dissipate,” Bastos said.
A clear home bias is evident in HSBC’s current fund offerings. Some $21.8 billion of AUM is managed by the firm’s equity management team located across Asia Pacific. Of this, less than $1 billion is managed in regional Asia funds – the rest is in seven country-focused funds (Chinese, Hong Kong, Indian, Korean, Singapore, Taiwan and Thai equity); three China funds (consumer opportunities, growth and momentum); and the Asia portion of global funds.
Global funds include a global equity volatility focused fund managed out of London – with input from the Asia equity team – which has already grown to some $904 million AUM. That fund was made available to retail investors in June 2014 after two years of only being available to institutional investors.
In contrast, the HSBC Asia-Pacific ex-Japan equity volatility focused fund is being launched to both retail and institutional investors at the same time. That is because the strategy has been proven based on the performance of the global fund, said Bastos. HSBC GAM already has plans to launch an emerging markets equity volatility focused fund later this year.
The Asia fund’s “engine is similar to the one used for the global fund,” said Bastos. That engine uses a methodology to filter down around 680 stocks in the MSCI all countries Asia-Pacific ex-Japan index to 200 based on liquidity, profitability and valuation.
Currently Asia equity valuations are some 30% below MSCI World. Cheap valuations have come on the back of several years of flat earnings growth, said Duggal. He sees a pick up in earnings growth in Asia driving up returns on equity. Credit Suisse sees MSCI Asia Pacific ex-Japan equity earnings per share growth rising from 6.7% in 2014 to 8.4% in 2015 and 9.7% in 2016. Earnings growth rising from “mid-single” to “close to double digits” will be a “catalyst to unlock cheap valuations,” said Duggal.
“The [low] volatility of the fund is not an objective of the product but an outcome of the construction of the portfolio,” explained Bastos.
He added there was a lot of interest from institutional clients to increase allocation to Asia - across strategies - as they seek to boost their exposure to the region above levels indicated by the global indices they track, which exclude China. HSBC’s Asia-Pacific ex-Japan equity volatility focused fund will be benchmarked to the MSCI all countries Asia Pacific ex Japan index, which also excludes A shares.
HSBC's house view is for global liquidity to peak at $11 trillion by the end of 2016, up from $9.1 trillion at present despite the expected interest rate increases in the US.