Investment Universe, Process, Strategy and Benchmark – How does the Fund Manager invest? (ISIN: LU0165073775)
The investment universe is defined as follows:
- European Small Cap securities: 50 % of the portfolio must be made of companies with a market capitalisation of up to € 3 billion (at purchase);
- Minimum free float : none;
- Liquidity: it must be possible to build a position within 3 days without trading more than 30% of the daily trading volume of a security;
- Share capital: investment targets to be below 5% of a company’s share capital.
Our conviction is that the European Small Caps investment universe is relatively inefficient, thus presenting opportunities to achieve excess risk-adjusted returns. We believe that companies offering internally and externally generated growth at compelling valuations will provide superior shareholder returns over time. Our success in producing out-performance relies on our ability to analyse company growth profiles to assess their sustainability.
Our style is characterised as a bottom-up stock selection guided by thematic factors with a key focus on 1) higher than average sustainable growth rates 2) free cash flow generation and 3) minimum standards in terms of balance sheet quality.
The investment process follows four steps. The diagram below illustrates the four steps of the investment process:
Source: HSBC Global Asset Management (France). For illustrative purposes.
Step 1: Theme selection
Small Caps mainly differ from Large Caps in their higher sensitivity to macro and liquidity factors. The portfolio managers analyse the key drivers influencing the economic conditions of European countries (economy, political risk premium, tax and regulatory regimes, etc).
The thematic framework is based on a mix of our in-house economy/strategy view and the feedback loop provided by the management of different companies that we visit. The first step also identifies “opportunities” such as IPO’s, M&A, restructuring…), which is considered to be a structurally permanent theme.
Step 2: Proprietary financial analysis
Within the theme selection, the portfolio managers look for companies with a supportive environment in terms of sectors or niches and pay particular attention to sales and earnings growth, which is based on a number of variables such as positioning in the economic cycle, growth and profitability prospects, managing structural change, access to capital and ability to innovate and to integrate acquisitions.
The information flow regarding companies is shared daily. In addition, the entire Small & Mid Caps team takes part in the weekly committee, which provides a forum to analyse returns across all portfolios: this includes key contributors from holdings, news events, as well as due diligence reports of company visits and other relevant information from sell-side research.
Our stock-picking is focused on the following four types of companies:
- Companies benefiting from strong organic (internally developed) growth combined with an attractive valuation;
- Companies improving internal efficiencies through restructuring;
- Companies engaged in special situations (IPO, M&A, …);
- Defensive growth companies with a high level of visibility.
Company analysis is split into two parts:
- Quantitative (25%): Valuation relative to peer group
- Qualitative (75%): Company analysis, Profitability analysis, and News flow
Some of the common valuation measures used by the team are: Price to Earnings Ratio, EV / EBITDA, ROE for financial sector.
Company visits and seminars are the primary information and analysis source for our portfolio managers. Moreover, the portfolio managers use external sources such as: sell-side research, company annual reports, databases and real-time information flows such as Factset, Bloomberg and IBES.
Step 3: Portfolio construction
Communication and information flows drive the team’s organisation. Each portfolio manager is responsible for his or her own investment decisions which have been discussed by the team. The portfolio manager maintains approximately 50 to 60 stocks* among the analysed securities for each portfolio. Because it is a conviction-based approach, individual stock weightings tend to be concentrated within a 1.5% to 2.5% range*. Generally, for diversification and liquidity purposes, the weight of a single security will rarely exceed 4%*of the portfolio.
* These objectives do not constitute a commitment from HSBC Global Asset Management (France).
The portfolio manager constructs the portfolio taking into consideration:
- Intrinsic characteristics: investment universe, risk/return profile (performance objectives and risk control framework);
- Regulatory and contractual constraints linked to the legal structure of the portfolio;
- Valuation and liquidity of the selected stocks;
- Technical analysis of markets and selected stocks;
- Optimisation of dealing execution: for that purpose, the portfolio manager relies on the dealing desk.
There is no specific sector or country allocation in the portfolio construction. Only theme selection is used to construct portfolios. However the portfolio managers go through daily monitoring of sectors and countries.
Step 4: Risk analysis 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.
The representative portfolio HSBC GIF Euroland Equity Smaller Companies does not have an official benchmark but the team uses the MSCU EMU Small Cap index purely as a point of reference.
Performance Review 2005
Florence Bannelier: "As background information to performance of the HSBC GIF Euroland Equity Smaller Companies fund in 2005, it is important to note the fund was managed against an MSCI Europe Small Cap index. During this time Florence Bannelier, stationed in Paris with the French based team, managed the fund through a team approach, involving the small cap teams from the UK and Germany. It wasn’t until 2006 that Florence Bannelier assumed full management of the portfolio without the intervention of the other offices. Managing the idiosyncratic UK small cap market no longer made sense. Therefore the benchmark was changed at end June 2006 to a Small Cap Euro benchmark.
As for performance in 2005, the fund tracked the Europe Small Cap index quite consistently until November 2005. Then it underperformed the index in the last two months of the year because the fund was underweight the UK market which surged relative to the rest of the European market."
Performance Review 2006
Florence Bannelier: "In 2006 the supportive market environment favoured our strong thematic growth approach. Returns accelerated over the period, particularly in the fourth quarter of 2006. The main driver was a strong overweight position in cyclical stocks which were the most to benefit from high economic growth. A few key themes added value, notably development of international trade; infrastructure investment; in China; dredging and civil engineering all around the world; economic growth of Eastern Europe; Healthcare and ageing of the population; and scarcity of natural resources."
Performance Review 2007
Florence Bannelier: "In 2007, the strategy performed in line with the index. The negatives were the decline in oil prices in the beginning of the year which affected stocks tied to that sector. There was also a sell-off at the end of the year, which affected the high liquid stocks which the fund tends to hold."
Performance Review 2008
Florence Bannelier: "In 2008 the fund outperformed significantly in the first half of the year. After the Lehman bankruptcy, and the surge of redemptions across small cap funds, we lost back some of the outperformance because the most liquid securities were sold first while the very small cap companies were simply not sellable due to lack of volumes, thus keeping their prices relatively intact."
Performance Review 2009
Florence Bannelier: "In 2009 the fund underperformed during the initial rally starting in March because the lowest quality cyclicals and smallest market caps achieved the best performance. In the second half of the year the rally extended to the higher quality growth companies and the fund ended the year as the best performing fund in its peer group."
Performance Review 2010
Florence Bannelier: "The fund significantly outperformed the reference index in 2010. The first key reason was an absence of exposure to peripheral euro zone countries such as Greece, Portugal and Ireland. And the second was an exposure to Emerging Markets, particularly in infrastructure, capital equipment, consumer goods, materials and luxury goods. The depreciation of the euro helped to bolster export oriented companies."
Performance Review 2011
Florence Bannelier: "The fund slightly underperformed the reference index in 2011. The fund slightly underperformed in the Q1 because it did not benefit from rebound in the financial sector in which it was underweight. In Q2, the fund continued to underperform because German export oriented companies were vulnerable to fears of a downturn in the Global economy. In Q3 the fund improved its relative returns because it was less affected by the financial crisis contagion; however it was penalised by its exposure to Emerging markets. It wasn’t until Q4 that the fund really outperformed the market index (+3.3% relative) due to its exposure in global oriented quality cyclical and oil services."
Performance 2012 - Year-to-Date
Florence Bannelier: "The fund outperformed in the first month of the year thanks largely in part to its exposure to companies with a higher exposure to emerging markets, mainly in Asia and Russia and to oil service companies which benefitted from resilient petrol prices. The overweighting in commodity oriented companies also boosted returns."
Performance since 2007
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 www.assetmanagement.hsbc.com/at.