HSBC aiming to change with the times

At HSBC Global Asset Management in London, Farley Thomas, head of worldwide wholesale distribution, is taking the opportunity, presented by a falling back of customer interest in mutual funds during the global crisis, to address gaps in the investment giant’s vast suite of investment products. “For the last five or six years, you might have had an inkling of what works and what doesn’t, but you didn’t need to do too much about it,” admits Mr Thomas. Now, as well as closing some funds and merging others, he will look at how to create products to satisfy distributors’ demand. The biggest gap for HSBC’s $352bn (E270bn) funds operation is in the passive space. There has been a huge shift of global distributors, such as UBS Wealth Management, into core-satellite asset allocation models, with exchange traded funds (ETFs) at the centre of discretionary portfolios. Rather than worry about competition to its active fund family, HSBC is ready to increase its footprint in the passive sector. “We are going to embrace these trends, not fight against them,” affirms Mr Thomas. His funds house was one of the first to restructure itself, under then CEO Alain Dromer – now top boss at Aviva Investors – to separate large volume passive investing and quant strategies from high alpha, more esoteric products. The concept of ETFs and quant strategies fits perfectly into the tried and tested structure. “It is a scale product, and one which needs fund administration and custody expertise. For this, we are one of the leading players,” adds Mr Thomas. HSBC’s passive and quants arm, Sinopia, already runs index-tracking products, so ETFs would be a natural progression. Goldman Sach’s and Morgan Stanley have recently joined forces to launch a range of ETFs, under the name of Source. With Barclays’ iShares franchise sold to CVC Capital Partners, bets are almost off regarding new entrants. “On a three-year view, I would be amazed if HSBC are not a major player,” he predicts. Unlike other managers, such as Aberdeen or Schroders, who define themselves as long-only active houses, waiting for cycles to turn round until their products are back in favour, HSBC believes it must change with the times and add products in those areas where growth is likely to occur. “These days, you cannot think only about threats, as you would go out of business. You need to turn them into opportunities,” says Mr Thomas, who thinks the changing climate has led to calls for a greater choice of passive providers. “Two years ago, most people would have said the market is stitched up, but now, one lesson we can learn is that you can’t have enough competition as things can go wrong, especially with solid, global brands.” In tandem with this trend towards passive allocations, Mr Thomas is expecting a wholesale re-think of wealth management remuneration models. “We will see a more rapid move to getting paid for serious advice, not for selling high-margin products,” he says. Growth of ETFs If it takes place - and asset managers have been calling for the new fee model for many years - this change would slot snugly into the active-passive shift, bearing in mind distributors have been rewarded for peddling high-alpha high fee products, with little incentive to sell black-box, computer-generated ETFs. “If 2008 was the year of shock – similar to 9/11, things happened which people couldn’t believe, like Lehman going bust – 2009 will be the year of asset allocation,” predicts Mr Thomas. Most multi-asset funds already have 15 to 20 per cent in ETFs and we will see that percentage grow further, he believes. Fund managers will be building products using the whole toolkit they have got at their disposal, rather than narrowly focused funds, he adds. “At the average fund management group, there are funds managed by one internal team, then the multi-managers sitting over somewhere in the corner. Very few will blend the two. The multi-manger corner doesn’t currently use an active-passive philosophy. Now all these artificial distinctions will be taken away and fund managers will be using all their components in the best way they can.” He cites HSBC’s World Selection product, which has raised £100m (E112m) since launch in February, as an example of the brave new world hybrids, combining active management, beta, internal and external funds. However he does expect the rules of deployment of third party funds to change. “In the old days, fund selectors would come round and check if the shop is still there. Today, people are more and more reluctant to send money to an outside firm.” This hesitance, reckons Mr Thomas, will manifest itself in a move away from off-the-shelf sales and funds of funds towards ‘manager of managers’ products, such as the multi-alpha range launched by HSBC in Luxembourg last year. “There is one custodian, one administrator, one fund. So at any moment in time, you know exactly what is in your portfolio. That is much harder with a fund of funds, if you want to know your total exposure to a stock, fund or sector.” While Mr Thomas is keen to spread the multi-manager concept through external distributors he recognises that HSBC Private Bank on a global basis and HSBC’s 1450 UK retail branch network are his two biggest customers by far. “We can double our assets just selling to existing customers,” he claims, adding that there is a “long way to go” in terms of presentation when selling to third-party banks. Five years ago, HSBC’s retail bank entered multi-tied agreements, selecting a handful of external fund managers, including Schroders, Fidelity and JP Morgan, plus Mr Thomas’ internal funds arm, to manage assets for branch customers. Unlike the situation at other banks such as Deutsche in Germany, where house fund group DWS kicked up an almighty stink about rival brands added to the roster, HSBC Global Asset Management faced the new deal with equanimity, according to Mr Thomas. “We are the world’s most grown up fund manager, as we did not get hung up about it,” he claims. “It is very difficult to be credible and to maintain that you can provide end-to-end service.” But while he has embraced the system, Mr Thomas is not necessarily overjoyed with it, acknowledging the training challenges it generates for bank staff and the increased possibility of bank customers simply choosing rival products. “Your luck doesn’t improve, as there are more funds to choose from,” he states. Wealth management in a box One of the new approaches Mr Thomas has been developing for dealing with private bankers is his “wealth management in a box” presentation. This is a pitch made to distributors, where key products are not actually mentioned. “We don’t have a crystal ball and are not the best in everything in a portfolio, but we are good at a few things,” he says. Basically, his pitch runs as follows: the HSBC funds arm has 600 products, so if a fund is in demand, it will be built and sold, whether in active, quant or multi-management sectors. “Rather than talk about our best-performing Indian equity fund, we prefer to talk about our skills and how we can match them with what the private bank needs. This is a much more interesting conversation and more relevant to the client.” But the conversation will generally move, eventually, to some of the hot products which HSBC GAM is pushing. These are mainly on the fixed income side and include the Strategic Credit fund, Global Credit Opportunities and Emerging Market Credit. With small teams on the ground in Italy, Spain, Poland, France and Germany, Mr Thomas confirms that for all these markets, we are entering a period where brand is really starting to count. In Italy, HSBC took a whole team from JPMorgan Fleming in 2001. They came with some “fantastic relationships” including funds of funds, private banks and insurance companies. Yet Mr Thomas acknowledges that no matter how innovative your products, you cannot go against the very challenging environment in such markets. In terms of flows, the UK has been the most positive market in Europe for HSBC GAM, although countries where the presence is fairly new and there is “more to gain and less to lose,” such as Austria and Poland have also done well. HSBC has the largest number of distribution agreements among all foreign groups in the Polish market. Overall net outflows for the group, across all markets, were $9bn (E6.9bn) in 2008. “One of the unfortunate effects of the long bull market was that everybody said they were well resourced and backed by a strong, world-class parent,” says Mr Thomas. “Product providers now will be a lot more cautious about such heroic statements.”