Always read the fund documents

[Deleted User]

I was surprised to see this when I looked at HSBC Global Strategy Cautious. I looked at the fund annual report and on the balance sheet was this

Forward Foreign Exchange Contracts - 0.34% (0.21%)
#Sold €23,483,081 for £20,273,226 settled 9/5/2019 6 0.00
#Sold $100,248,950 for £76,728,103 settled 9/5/2019 383 0.25
#Sold ¥2,181,257,298 for £14,997,407 settled 9/5/2019 138 0.09
#Sold £249,430 for ¥36,282,102 settled 9/5/2019 (2) 0.00
Total Forward Foreign Exchange Contracts 525 0.34

Fund's assets were £155 million.


Personally this makes me slightly uneasy that there is so much derivatives and in the event of a crash or hyperinflation, I wonder if this could cause a problem.

eskbanker

So much? As stated in your copy/paste, those contracts form 0.34% of the fund's assets, i.e. pretty much rounding error magnitude....

Linton

Currency hedging which may well be what you want with a cautious fund? The Prospectus says:

The object of the Company is to invest the scheme property in transferable securities, money marketinstruments, deposits, units and shares in collective investment schemes, cash and near cash, derivativeinstruments and forward transactions, immovables and gold in accordance with the FCA Rules applicable tothe Company and each Fund (which may include stock lending, borrowing, cash holdings, hedging and using other investment techniques permitted in applicable FCA Rules) and subject to the limitations set out in the Prospectus with the aim of spreading investment risk and giving its Shareholders the benefit of the results of the management of that property.

MarkCarnage

Quantity is de minimis as noted.

Also not sure why you are specifically worried about a 'crash' or hyperinflation for this? Worry about equities for the former and nominal bonds for the latter by all means....

The principal concern for derivative contracts would be failure of the counterparty, usually mitigated by exchange traded versions or collateral. For standard FX forwards, there is no concern.

[Deleted User]

eskbanker wrote: »

So much? As stated in your copy/paste, those contracts form 0.34% of the fund's assets, i.e. pretty much rounding error magnitude....

Look at the amounts on the line
#Sold $100,248,950 for £76,728,103 settled 9/5/2019 383 0.25

£76.7 million is more than half the value of the fund.

eskbanker

newbinvestor wrote: »

Look at the amounts on the line
#Sold $100,248,950 for £76,728,103 settled 9/5/2019 383 0.25

£76.7 million is more than half the value of the fund.

Look at the whole line, including those figures at the right hand end, i.e. £383K and 0.25% of the fund's assets....

[Deleted User]

eskbanker wrote: »

Look at the whole line, including those figures at the right hand end, i.e. £383K and 0.25% of the fund's assets....

£76 million

bowlhead99

The HSBC global strategy series of funds are risk targeted rather than just being a bunch of direct index holdings.

Each quarter the fund manager publishes a summary asset allocation and target asset allocation. According to the 2019 Q3 portfolios asset allocation, fixed income exposure is entirely hedged to GBP in all the portfolios, while the approach to hedging non-GBP currency exposure from developed market equities differs between the portfolios, depending on risk profile. Allocations at Q3 included (for example), for GS Balanced, about 32% US equity (partially hedged to GBP), about 9% Europe equity (partially hedged to GBP), about 5% Japan equity (partially hedged to GBP). While in the Cautious fund these figures were more like 12%, 3%, 2%.

If you are looking at the Cautious fund which is circa 70% in global fixed income (all hedged to GBP) and a slug of the foreign equities are partially hedged too, it's not particularly surprising to see that you have over £100m of FX forward contracts settling at some point after the year end, on a fund NAV of £155 million. How else would you expect them to achieve the hedging?

Of course if you think it would be better to just take the raw returns of the German bonds, Japanese bonds, US bonds etc, fearing the worst, that's your prerogative and you should avoid funds that hedge. However, many mixed asset funds do hedge (especially the overseas bond exposure) because if bonds are in the portfolio to take the edge off valuation swings, many people would be upset that their fund lost 25% of the US bonds value just because dollar/sterling reversed the move it made in the aftermath of the 2016 referendum.

eskbanker wrote: »

So much? As stated in your copy/paste, those contracts form 0.34% of the fund's assets, i.e. pretty much rounding error magnitude....

newbinvestor wrote: »

Look at the amounts on the line
#Sold $100,248,950 for £76,728,103 settled 9/5/2019 383 0.25

£76.7 million is more than half the value of the fund.

eskbanker wrote: »

Look at the whole line, including those figures at the right hand end, i.e. £383K and 0.25% of the fund's assets....

The small amount in percentage is what the value of the FX contracts were as a proportion of the investment portfolio. The contracts mentioned (obligation to settle the currency trade at an agreed rate on a future date, which may be higher or lower than if you were to do the trade at spot rate today) have a value, so they go on your balance sheet as an asset or liability on their own right. The pile of forward currency contracts, as an asset, had a value of £525k, about a thirtieth of the value of the fund. But that asset would move in value significantly with currency rate changes, because the contract is the obligation to sell over £100m of foreign currency on a fixed date for a fixed value, and the £100m+ is significant in the context of the fund itself only being worth £155m.

If the dollar rate changed from $1.3=£1 to $1.75= £1 it would be terrible for the $100m of dollar assets you might hold because those equities and bonds would become worth a lot less in GBP. However, your currency forward contract to sell $100m for £76m would become incredibly valuable (worth millions, not just worth the few hundred grand it was worth at the balance sheet date), and the gain on it would cover the losses on your US bonds and treasuries.

If you don't want to be hedged, don't use a fund that hedges. For fixed income, using global bonds hedged back to GBP can get you diversification of income rates and issuer while keeping stable returns. For equities arguably you might prefer those unstable returns and not want much hedging because you don't know where the GBP will go over the long term for better or worse and you want genuinely global exposure. However, in cautious products, the UK consumer typically doesn't want 95% foreign exposure within his equities, as currency movements can make big differences to outcomes.

The thread title is sensible advice for anyone doing DIY investing, though more experienced investors might not necessarily be made 'uneasy' with what they find, if they already have an appreciation of how funds are constructed and what range of methods might be employed to achieve objectives.

[Deleted User]

The problem I have is that it was not very clear that the fund seems to operate as mostly GBP hedged.

bowlhead99

newbinvestor wrote: »

The problem I have is that it was not very clear that the fund seems to operate as mostly GBP hedged.

There is a lot of legwork involved in picking funds.

I suppose you could say it wasn't very clear, that is, until you looked at the prospectus and found out that they have a long term strategic asset allocation that aims to maximise returns for a given level of portfolio risk, together with a shorter term tactical overlay which aims to make timely adjustments to allocations to reflect the team's views on the current market environment - and that as part of all that, within their implementation, "Forward currency contracts will be used to gain exposure to currencies or for hedging purposes to reduce the impact of certain asset classes that are not denominated in sterling".

Then you would have looked at the accounts and seen that they had hedged out a significant amount of Forex exposure within the fund total NAV through forward contracts in both the half year and full year accounts. All of that sort of stuff would supplement your understanding that you'd got from their published factsheet and KIID.

As the factsheet mentions, all subscriptions are accepted on the basis of the Prospectus, KIID, SID and most recent annual and semi-annual reports, so you shouldn't ignore any of them:
https://www.assetmanagement.hsbc.com/uk/individuals/gfc?fundid=HOPF005&SH=Acc%20C

If you weren't put off at this point you might try to learn more about their processes and current strategic and tactical asset allocations by going to the 'financial intermediary' version of their website and pretending you were a financial adviser looking to use his professional expertise to advise a client using the marketing materials that they make available for advisers to share with their advised clients, as part of an advice process.

Those materials are generally more comprehensive than what they release to direct retail customers because 'a little knowledge is dangerous' and they try not to give the more complex materials to direct retail customers who may not really comprehend the concepts in the absence of a guiding hand to explain what is going on.

Rather than publishing documents to retail customers who may get the wrong end of the stick, it's better for them not to tell the retail investors more than the basic: 'we try to get you a good return for your risk profile using mostly passive funds, using these sorts of assets, and we might hedge them; pick a risk level from 1 to 5."

So when you try to build a portfolio as a retail investor you may struggle to get much insight into their process, if you don't want to buy advice. A consumer portal like Hargreaves Lansdown (other DIY platforms are available) might not even point you to the full prospectus or reports link, just a few recent years of performance in a chart and a KID to check the box that you've read. If you've heard what the main risks are and what the fees are, the FCA are happy you are taking the risks on your own head when you buy - so you're ready to invest ; if you don't want to buy advice to help make the decisions, that's your lookout.

The headlines in an article or factsheet published to a basic retail customer are often simply not enough to do a good job of DIY investing. You have to at least do some rudimentary checking under the bonnet. For me, I just put my 'sophisticated /institutional investor' hat on and try to seek out all the information I possibly can from the fund manager and from other reputable sources, to inform my decisions - but many investors don't have the skills or experience to know what they are looking for or how to know they've found it.

Fortunately for the majority of retail investors their biggest investments are their workplace pension; there, there is limited info about the default fund, and they just know they are getting a blended investment across asset classes and can increase or decrease the risk/volatility level if they want. You could treat the HSBC Global Strategy range as a similar product. For most users, what the fund or fund manager does, is more important than how they do it. Leave the research and strategic/tactical allocations to them. If you want to fully understand and control the product, you should perhaps do your own research and build a portfolio for yourself.

[Deleted User]

I agree with most of that however I don't think most investors look at the prospectus. They will probably only look at the factsheet and KIID.