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Fund Update: HSBC GIF Euroland Equity AC EUR

Das folgende Fund Update bietet einen Rückblick auf die Performance des Fonds über die letzten sieben Kalenderjahre sowie über die aktuelle Year-to-Date Entwicklung. Der Fondsmanager Frederic Leguay zeigt die wichtigsten Punkte des Investmentprozesses und seine Strategie auf. Funds | 01.03.2012 04:30 Uhr

Investment Universe, Process, Strategy and Benchmark – How does the Fund Manager invest? (ISIN: LU0165074666)

Investment philosophy

The investment philosophy for Euroland equities strategies is based on the belief that:

  • Equity markets are not efficient, resulting in opportunities to garner excess risk adjusted returns;
  • It is possible to achieve out-performance by exploiting the strong relationship that exists between profitability and valuation;
  • When following a fundamental approach, a long-term investment horizon is more appropriate;
  • Profitability is our framework, valuation our discipline.

Investment management style
Our Profitability and Valuation approach integrates a limited value bias. This comes as a consequence of:

  • Our belief that prices are more volatile than fundamentals, which are a function of structural profitability;
  • Our conviction that valuation drives return over medium term in the equity asset class.

In short, we believe there is a lot of variability around a security’s valuation even if profitability remains intact. In addition, portfolio managers having used this approach over the last five years have developed a contrarian attitude with respect to equity investment.

To that extent, the investment process relies on:

  • An investment philosophy for the equity markets based exclusively on stock-picking;
  • Sound investment decisions in the long run on the basis that good economic returns are eventually rewarded by strong stock market returns;
  • An approach that involves strong price discipline: a highly profitable company is not necessarily a good investment.

Profitability and Valuation investment process
The investment process of our Euroland Equity strategy, which is based on a Profitability and Valuation approach, is structured in four steps as illustrated below:

Source: HSBC Global Asset Management. For illustrative purposes only

1st step: Identification of attractive investment candidates
The first step enables the team to cover the Euroland equity market selectively by picking companies, which exhibit the best trade off in terms of Profitability and Valuation. The investment universe for portfolios invested in the Euro zone consists of companies with a market capitalisation exceeding EUR 1 billion at the time of purchase. This universe of over 500 stocks includes both MSCI EMU index and non-index stocks. Approximately 2/5ths of this universe is potentially interesting from a Profitability and Valuation perspective. 

In order to identify the attractive stocks, we have developed a proprietary tool predominantly based on the two following inputs:

  • Profitability, which is assessed through the return on capital ratios.
  • Valuation, which is assessed through different accounting and market ratios including Price / Book Value and Enterprise Value / Capital Employed ratios.
    The Profitability/Valuation tool is illustrated below:

Source: HSBC Global Asset Management. For illustrative purposes only

2nd step: Company research
The research is focused mainly on companies which have already been identified as attractive in the first step of the investment process. Our research aims first and foremost to understand and appraise profitability, before proceeding to the valuation phase of our analysis. By definition, the valuation should be attractive according to the initial valuation ratios. However, valuation will still require fine-tuning by our Research and Development team with the aid of more sophisticated tools.
The approach is designed to be pragmatic and thorough at the same time. Both the portfolio managers and analysts, specialised by large industry groups (industrials, financials, consumer goods and TMT), take part in this research effort. Research is carried out selectively; we do not aim to provide full market coverage.
The analysts’ role is to employ their sector and accounting expertise in order to raise the level of conviction of the portfolio manager on the company’s profitability scenario. The analyst also reviews and assesses the assumptions used for the valuation case.
Hence, the focus is on understanding the companies’ profitability cycle, so as to identify and make a distinction between the cyclical and the non-cyclical components of profitability. The fundamental analysis is performed through the assessment of four key components, which can be further broken down into 40 sub-components.

  • Operating margins (sales, costs, …);
  • Asset efficiency;
  • Liability structure (leverage, rating, …);
  • Quality of earnings (“cash component” of profits, sustainability of profits …).

This analysis is based on:

  • Income and company cash flow statements;
  • Company meetings: we only invest in companies that we have met and interviewed. Analysts systematically prepare a questionnaire prior to company meetings in order to test their assumptions on the profitability components. This also involves gathering information on the company’s business climate (clients, competitors, suppliers and industry consolidation);
  • The analysts also use sell-side research in order to get to the heart of key profitability issues, usually by questioning sell-side analysts holding contrasting views.

Once the analysts and portfolio managers are comfortable with the profitability scenario, they seek to determine the correspondingly appropriate valuation. They will not consider buying the stock if the corresponding valuation is not attractive. For this purpose, the analysts carry out traditional valuation studies including:

  • Market and industry specific valuation ratios;
  • Discount Cash Flow;
  • Profitability and Valuation peer comparison;
  • Sum of the parts.

Hence, a strong price discipline drives the portfolio managers decision-making. We favour companies capable of maintaining or increasing their level of profitability at a corresponding attractive level of valuation. When valuation becomes unattractive and/or the profitability outlook deteriorates for a specific stock, the relevant analysts and portfolio managers re-evaluate their view. Analysts and portfolio managers communicate on a daily basis as well as during their regular meetings.

3rd step: Construction of the portfolio
Portfolio managers are entirely responsible for stock selection in their portfolio.

The portfolio construction takes into account:

  • The portfolio manager’s convictions in terms of Profitability and Valuation, resulting in a concentrated portfolio of approximately 50 positions for the Euroland equity portfolio, a minimum of two-thirds of which must be large caps;
  • The benchmark has no impact on stock selection and very little on portfolio construction;
  • The size of positions generally ranges from 1% to 5% and reflect the portfolio manager’s convictions on Profitability and Valuation. Positions in middle caps can be significant when the investment case is particularly strong;
  • The strategy is characterised by a relatively low turnover, reflecting the long-term nature of our profitability scenarios (three years minimum);
  • Sector diversification: portfolio must be invested in at least 15 out of the 24 MSCI industry groups;
  • The liquidity of stocks and the optimisation of trading: the portfolio manager relies on our dealing team;
  • The portfolio manager takes the investment decisions and delegates trade execution: all transactions are executed by an experienced dealing desk specialised by asset class, with respect to “best execution” principles;
  • The beta of the portfolio has historically been close to 1. We do not believe in playing high beta in a rising market and low beta in a declining market.

Portfolio construction is first and foremost based on producing excess returns through our conviction in the underlying stock holdings. As such, two internal tools have been developed with the help of the Research and Development team for portfolio construction:

The first is called Portfolio Analytics. It helps to ensure that the fundamental convictions in our stock holdings are also reflected at the portfolio level. The tool provides a snapshot breakdown of the portfolio relative to the benchmark in terms of fundamental and statistical aggregates. Fundamental aggregates are defined such as size (market value, assets, net sales etc), valuation (price to book, price to earnings, RoE/PB Trade-Off, Dividend Yield, etc), profitability (ROE, ROA, Ebitda Margin, Earnings Quality etc.) and other pertinent ratios such as volumes, leverage and capital expenditure ratios. Statistical aggregates provide a snapshot of the distribution of risk relative to the benchmark in terms of volatility, tracking error and beta.

The second is the “Point” function of the “Stock Analysis” tool, generated from the “Eurocorp” database, holding over 25 years of historic data. It is a relative valuation tool for all companies in our universe. It also allows us to plot snapshot scattergrams of the positions of all the stocks in the portfolio relative to the fundamental Profitability and Valuation tool described in the first step of the investment process. The managers can also run back tests of the returns of the Profitability and Valuation model and compare these with the real returns of their portfolios.

4th step: Risk monitoring and control
The risk control process is integrated in the portfolio management and is structured in several levels:

Front-office level lies with the portfolio management team who is responsible for identifying, monitoring and controlling risk. The dealing desk is involved in coherence checks at this level.

1st level controls are the responsibility of the Portfolio Risk and Regulatory Restrictions Control teams; they are in charge of systematic financial and operational risk controls.

The Portfolio Risk function consists of three teams:

  • Risk Standards, Models & Methodology team is in charge of defining technical methods for calculating risk metrics, and documenting the parameters for risk metrics and models.
  • Risk Analysis Management team is in charge of checking that portfolios meet their investment guidelines. This team monitors all types of investment risk including: market, counterparty, credit, liquidity, performance, and model risk.
  • Risk Performance Attribution team is in charge of producing portfolio performance attribution reports for risk purposes, portfolio managers and client service.

The Regulatory Restrictions Control team carries out the direct control function: checks compliance with the regulatory guidelines, contractual commitments and HSBC Global Asset Management internal rules and provisions. The team matches positions with ratios defined for each portfolio.

Moreover, two teams from the middle-office are involved in the 1st level controls:

  • The Valuation Control team is in charge of ensuring the coherence of financial and information flow relative to portfolios’ valuations, mainly in terms of securities and cash positions, error detection and reconciliation.
  • The Operational Support takes part in the control of operational risks by following up on all transactions, controlling their characteristics and ensuring the efficient interactions with external parties.

2nd level controls lies with Compliance and ORIC teams. They are responsible for monitoring compliance of all procedures and ensure regulatory guidelines are respected, communicating on breaches and resolving incidents.

3rd level controls lies with internal control at a global level made by our Global Risk management team and the independent HSBC France Audit team.

External auditors carry out global monitoring.

There is no official benchmark for the HSBC GIF Euroland Equity, however the MSCI EMU (net dividend reinvested) is used as indicative index. This index is aligned entirely with our principles in terms of relevant construction methodology and required standards regarding homogeneity, representation, replication and transparency. The weightings of MSCI Indices are calculated based on the “floating” of stocks.

Performance Review 2005

Nelly Davies: "During 2005, HSBC GIF Euroland Equity strongly outperformed the benchmark and was ranked 15 out of the 105 funds in the S&P Euroland Equity offshore category.

In this environment, our Profitability and Valuation approach did well with the exception of the second quarter due to exceptionally positive earnings revisions in the energy and materials sectors where the fund’s exposure was low.

The fund started to really outperform in the 3rd quarter, when energy stocks started to lose momentum and our stock picks, especially in industrials and insurance fared well.

The top 15 stock contributors added 5% to the relative performance of the representative fund versus the benchmark while the bottom 15 stock contributors subtracted 3% from relative performance."

Performance Review 2006

Nelly Davies: "Strong stock selection was offset by a negative impact from sector exposure.
As a residual of our stock selection approach, sector positioning dampened returns. Our only real beneficial sector position was our relatively low exposure to the energy sector.

The biggest single negative factor was our low exposure to utility companies. After performing well for three years in a row, utility stocks were expensive according to models in 2006, but consolidation and speculation pushed valuation even further.

Our second biggest negative factor was technology stocks. After nearly four years of underinvestment in technology, corporates appeared to be opening their wallets again. This did not materialise in Europe as it did in the US. Technology stocks posted almost flat returns in 2006 in the euro zone, but did relatively well in the US Market (+9%). We were also slightly overexposed to pharmaceuticals, which underperformed yet again in 2006. Finally, we were underexposed both to Automobiles and Components and Banks, both of which surged by 32% and 25% respectively."

Performance Review 2007

Nelly Davies / Frederic Leguay: "In 2007, stock selection emerged by far as the main performance contributor. Performance attribution indicates that 97% of the total out performance was generated by stock selection compared to just 3% for the resulting sector exposure residual. The sectors where stock selection was especially strong are Capital Goods, Healthcare Equipment, Software and Services, Technology Hardware and Pharmaceuticals.

This was also a year in which a ROE/Price to Book - Profitability and Valuation model performed in line with the market. Thus, the team’s fundamental research approach was critical, particularly in terms of selecting companies on the basis of profitability scenarios. Our focus on specific profitability factors, namely earnings quality, (cash portion of earnings) and leverage, helped us to navigate through a deteriorating environment for profitability as a whole."

Performance Review 2008

Frederic Leguay: "The out performance of the strategy is mainly due to the positions taken on stocks with more stable profitability profiles. At the same time, the value bias of the strategy partly penalised the performance. Although our strategy remained relatively defensive, we gradually took positions on some transitory profitability companies because the valuation discount to growth stocks started to widen. This also included selected financials in the second half of the year which we had previously avoided. Therefore, most of the out performance occurred earlier on in the year. In terms of stock selection, our absence from Volkswagen was the most costly contributor over the year."

Performance Review 2009

Frederic Leguay: "The strategy posted strong returns in 2009. The stock selection effect was very strong and compensated for unfavorable sector positioning, mainly an underweight exposure to strong performing cyclicals (Banks, Capital Goods, Materials). Outperformance was strong due to increased exposure to transitory profitability companies in 2008 with a view that distressed valuations were being driven by sentiment and not fundamentals. The strategy benefited from having invested in companies standing to benefit from economic normalization. By end of the year, the exposure to the transitory segment diminished somewhat, but these continued to be the biggest contributors to performance but more so in the industrial space than in the financials, which gave back some of their gains after performing very strongly in the 2nd and 3rd quarters."

Performance Review 2010

Frederic Leguay: "The gross relative performance remains positive in 2010 in a market environment that has prioritized quality and earnings momentum and that has been impacted by a sudden return of geographic effect.
At end July, the Euroland Equity fund was 1% above the benchmark YTD : while modest compared to 2009, the performance was resilient in the face of very tough period for value oriented strategies. The team’s shift into higher profitability companies during 2010 is one explanation and the other is that selected stocks outperformed their peers on average in both cyclical and non cyclical categories, especially in financials and industrials."

Performance Review 2011

Frederic Leguay: "The Fund underperformed its indicative index by -3.6% over the year net of fees (retail a share class).

The HGIF Euroland equity fund outperformed by 1.2% gross of fees during the first half of the year on the back of the Energy sector (good stock selection); Healthcare (overweight & stock selection) and the Financials (good stock selection – mainly exposure to French versus peripheral country banks). However, stock selection in Materials was negative. Then starting in the summer, the market suffered from a deteriorating euro crisis on one hand and a slow down in India and Brazil and China on the other.  At the same time, contagion of high yields in the periphery of Greece, Portugal and Spain spread to Italy over the summer.

Starting in July, the fund started to suffer in relative terms.  The fund underperformed by -1.46% gross of fees in the 3rd quarter of the year, with 1.0% of this return attributable to September. In terms of sector exposure, our significant underweighting in Materials and overweighting in Healthcare was positive; however, our slight overweighting in Financials was slightly negative. It was stock exposure within French banks that was our single most negative contributor (-1.00%).  The fund’s value bias given our profitability/valuation approach was also a negative factor.  Value stocks, particularly in the financial and cyclical sectors were pushed downwards because the market had very little confidence in consensus earnings forecasts, rocked by a deteriorating and geopolitical environment.

In the 4th quarter, the fund underperformed by -1.0%, mainly due to stock selection, but relative returns improved in December to +0.6%, thanks to selection in Energy and Industrials. We didn’t fully benefit from the October rebound in bell weather cyclicals with exposure to emerging markets.  Moreover, the rise in French sovereign yields and concerns over downgrades to France’s AAA credit rating pressured French cyclicals (Cap Gemini) and financials institutions (Socgen, BNP Paribas, Natixis and AXA ). 0.6% of the underperformance was due to financials."

Performance 2012 - Year-to-Date

Frederic Leguay: "The fund performed in line with the reference index over the first month of the year. The best returns within the portfolio came from financials and deep cyclicals. Energy also performed well but one of our major holdings in the sector, Repsol, underperformed due to uncertainty of its assets in Argentina."

Performance since 2007

x Stock risk
x The Sub-Fund is exposed to equity markets for all or part of its total assets. The value of these assets can therefore rise or fall and investors may not get back all of their investment.
x Foreign exchange risk
x The Sub-Fund is exposed to foreign exchange risk for all or part of its total assets. The underlying assets may be denominated in a currency other than the dealing currency. The value of these assets may rise or fall in line with movements in the relevant exchange rates.
x Derivative risk
x The price of a financial derivative instrument (FDI) can be very volatile. This is because a small movement in the price of the underlying financial instrument may result in a substantial movement in the price of the FDI. Investment in FDIs may result in losses in excess of the amount invested.

This document is produced by HSBC Asset Management (France) and amended by HSBC Global Asset Management (Österreich). This document is designed for sales and marketing purposes for the introduced fund and is not an offer or invitation to make an application to invest in this fund. All statutory requirements concerning impartiality of financial analysis are unaffected. A prohibition of trading concerning mentioned financial products before publishing this document does not exist. This document replaces neither a professional investment advice nor a relevant public prospectus or any actual semi-annual and annual reports. It is not an offer for subscription. This document is only directed to persons who have a permanent residence in Austria. It is not determined to addressees in any other jurisdictions or to citizens of the USA. This document is only for internal use. The document or parts of it may not be disclosed to any third party or used for any other purpose without prior written consent. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. This fund may invest predominantly in financial derivative instruments. Derivative instruments can lead to a significantly more volatile price than the direct purchase of the underlying instruments. Due to the composition of the fund prices may fluctuate significantly in the short term to the downside as well as the upside. The fund is denominated in EUR currency. The fund invests in financial assets designated in a different currency than the base currency. If the investor’s domestic currency is not EUR, a further exchange risk may occur. This document is based on information obtained from sources we believe to be reliable but which have not been independently verified; therefore we accept no responsibility for accuracy and/or completeness. The opinions represented in this document express opinions of the author/ the authors, editors and business partners of HSBC Global Asset Management (Österreich) GmbH and are subject to change. The shift of opinion has not to be published. The fund is not suitable for every investor. It can not be excluded that an investment in the fund could lead to losses for the investor. It is also possible that an investor might lose all of its initial investment. All information within this document do neither replace the official legal documents for the fund nor the simplified prospectuses respectively the Key Investor Information Documents and the most recent annual and semi-annual reports. Actual Prospectuses, Key Investor Information Documents and the latest annual and semi-annual reports can be obtained upon request and free of charge from Raiffeisen Bank International AG, Am Stadtpark 9, 1030 Vienna. They are also available on the internet via

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