Originally from Hong Kong, Lee had been running HSBC’s alternatives business in London until October 2012. He then relocated back to Hong Kong to head the alternatives business and from June this year, the newly combined alternatives and discretionary division.
Fund selection revamp
In the last three months, HSBC has reshaped its fund selection process. Previously the process was done in Asia: a fund specialist who was also an analyst would do all the due diligence for the region.
However, separate teams in Geneva, London and New York were not fully involved with Asia, and the bank decided to combine them all to create a global due diligence team.
“Now, instead of having seven people in Asia on the fund specialist team, we leverage the entire global group of 20-odd people, which makes more sense,” Lee said.
Lee deals exclusively with discretionary mandates for clients $10m and above. Retail wealth management has a separate group that selects funds, though both groups share some basic due diligence processes.
The discretionary business, which HSBC calls “actively managed shares” accounts for 16% of the bank’s wealth management business, which Lee says is slightly above the average in Asia.
(HSBC globally had $921bn in total funds under management at the end of December 2013, slightly higher than the $910bn reported for the same period a year prior).
Lee said he aims to involve more clients with portfolio management. High net worth investors in Asia have not fundamentally accepted portfolio management, largely because a traditional trading mentality exists in the region.
“We’re trying to position in a portfolio context rather than saying `this is the best fund doing xyz in its class’. That’s almost secondary. It’s about the appropriateness of the asset class and the style of that management for a specific portfolio. Just because the best fund is available doesn’t mean it’s necessary for all clients. It’s not a one-size-fits-all.”
Regulators are also keen to see more investors shift to portfolio management, he said. “The challenge is that portfolio management is not in our client’s DNA. It’s been a trading mentality for many years and a change requires education and understanding.”
Nonetheless, discretionary mandates are growing, he said.
“Part of it is the move to a more portfolio approach from execution-only and advisory. Also, markets over the last year or two have run up considerably, yet macroeconomics are still pretty uncertain. Investors are not sure if we’ve hit the top or not. They’re uncertain about placing their own bets and are thinking about placing it through a professional.”
The power of liquidity
Across the region, HSBC has distribution agreements with 50 fund houses. In total, the bank has 300-400 approved funds it follows consistently on annual basis.
However, the bank declined to disclose the names of any recently invested or divested funds.
Speaking in general terms, Lee said liquid alternatives are popular.
“We are definitely seeing liquid alternatives as a major market trend. We’re seeing good quality opportunities for high net worth individuals.”
“In the hedge fund space, people have been paranoid about giving liquidity to people and then having a run on the fund overnight. But if you look at long-only funds managers, they have daily liquidity but they don’t have people pulling out of their funds. Liquidity is a comfort that investors like to have, and if you can provide it, why not do it?”
Lee also likes value trades, such as shifting from US to European or Asia equities.
Particularly attractive are China equities and the opportunities arising from the Shanghai-Hong Kong stock connect, which is expected to launch next month.
“We’ve been positive China equities early on this year. We’re focusing on the stock market [linkage] and the opportunities that result from narrowing the spread between A and H shares. We believe that gap will close on both sides as [China’s] A share market starts to allow people in Hong Kong to trade equities. In the short term, we’re looking for funds that have a share quota to participate in the arbitrage trade, though they’re not easy to find.”
Fixed income, which has been popular in Asia, is another matter. Lee doesn’t see the bond market collapsing tomorrow, but he is cautioning some clients.
“We’re telling clients who are overweight fixed income and long duration and lower down in credit quality that they need to be aware of the risk of things going sour. They need to reduce that risk right now. Asia has a high propensity to over- and under-weight on a large scale than the rest of the world due to the general lack of portfolio management.”
“Fixed income has been bought by everyone under the sun. The question is, who are the bidders going forward? That’s our concern.”
The regulatory backlash against retrocession fees — fees received by a bank for distributing third-party products to clients – in the UK and Europe is expected to come to Asia, Lee said.
“Everything that’s happening in the UK – retrocessions and so forth — is going to happen in the rest of Europe and Switzerland and then it will come here. Asia tends to follow best practices from a regulatory perspective.”
HSBC is about to revise how it deals with funds based on retrocession fees, he added.
“We are looking at offering clients options such as charging them a fee and offering them the lowest possible share price, rather than being rebated back by fund houses.”