William of Ockham was right. The 14th century friar and scholastic philosopher said that "plurality must never be posited without necessity". He gave precedence to simplicity, meaning that of two competing theories, the simpler explanation is to be preferred.
Complex solutions to solve basic problems
HSBC Global Asset Management manages $469bn across six asset classes supported by 600 investment professionals across 26 countries. Multi-asset makes up $83.1bn of this figure (as at the end of December 2017).
The asset management industry aims to serve the best interests of investors who want to generate a return on their capital. We have a fiduciary responsibility for our clients' money and we take this role very seriously.
However, the industry sometimes has a habit of building more and more complex solutions to solve the basic problem of how to generate a return, not always operating in the spirit of William of Ockham. Some of these complex products have been blamed for their contribution to the Global Financial Crisis, with the securitisation of sub-prime mortgages attracting particular attention over the following 10 years.
The impact of regulation
Since the Financial Crisis, the UK has seen a raft of new rules and regulations with the aim of making financial markets more efficient, resilient and, crucially, transparent.
Most recently, MiFID II has considerably expanded the scope and spirit of the transparency requirements introduced by the Retail Distribution Review (RDR). Among other changes, clients must now be told, both pre- and post-sale, about any costs related to an investment. Advisers also have the challenge of meeting enhanced client reporting requirements under which clients must be updated on the performance of their investments, more frequently.
All of this must, somehow, be done while also offering clients your core service: quality advice.
How can multi-asset help?
When appropriately constructed, multi-asset solutions are perfectly placed to deliver a transparent 'all in one box' solution to meet clients' investment objectives, meaning an adviser can focus on clients' life objectives.
Multi-asset evolution – our survey
There is a myriad of multi-asset strategies on offer to advisers all with different approaches and views on how to generate returns. So through independent research by Citywire and The Wisdom Council, we asked both advisers and investors what they really want from a multi-asset fund.
'Value' was the resounding theme. Yet 'value' is subjective, and goes much further than value for money.
With this in mind, we streamlined the asset classes in the portfolios and removed ones where the costs didn't outweigh the benefit, such as hedge funds. We believe that assets used to fulfil our portfolios should only be included if they can be fully understood, are sufficiently liquid, and effectively replicate the asset class in a cost efficient way.
Investing, by definition, is for the long term. Complex strategies may deliver in the short term, but we believe portfolios should be constructed with consideration to the long term expected return patterns for each asset class, with any speculation on short term trends limited to smaller tactical tilts, making HSBC Global Strategy Portfolios a core investment in a long term strategy.
We balance simplicity and diversification. In short, there is value in being boring.
Active-active or passive-passive?
With the high proportion of returns being driven by asset allocation it is worth differentiating those that have a dynamic view of the various markets, making active asset allocation calls (ie. daily or weekly) from those that take more of a passive approach, believing in a static (typically annual) asset allocation decision.
Coupling this with whether the underlying holdings are actively or passively managed, the choice for advisers has typically been to select either an active-active or passive-passive.
Herein lies the next phase of the multi-asset evolution. Active-passive.
We at HSBC Global Asset Management believe that in active asset allocation with passive fulfilment, enabling advisers and clients to benefit from the key driver of performance at a fraction of the cost. And value for money is anything but boring! However, as always the value of investments may fall as well rise and investors may not receive the original amount invested.
Cost and compounding
Over a hundred years ago Einstein referred to compound interest as the eighth wonder of the world. In 2018 this statement couldn't be truer with clients at their most cost conscious and a regulatory framework championing transparency. The effect of costs on compound growth is shown in the following table and further reinforces why cost and value is at the heart of HSBC's Global Strategy Portfolios.
As the modern William of Ockham may say: keep it simple, stupid.
HSBC's Global Strategy Portfolios cover five risk categories and start with an OCF of 17bps.
Effect of compounding charges
- £100k invested
- 7% growth rate
- 30 year term
Source: HSBC Global Asset Management
This graph is for illustrative purposes only.