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Mutual Fund Q&A: 
Absolute Returns through Diversified Assets
Author: Manish Shah
Last Update: 10:04 AM ET August 17 2010

As markets around the world have become increasingly correlated, investors are finding it more and more difficult to achieve true diversification within their portfolio. Charles Morris and his team at the HSBC Absolute Return Fund focus on absolute returns by exploiting investment opportunities in various asset classes and investment styles so as to generate consistent risk adjusted returns.

Q:  What is the history of the fund?

A : HSBC Global Asset Management is the core global investments solutions provider of the HSBC Group that manages assets totaling $427.3 billion. The company offers clients a diverse and full range of active and quantitative investment products including equity, fixed income, liquidity and alternative strategies.

The HSBC Absolute Return Strategy was launched in 2002 and, since its inception, the fund has attracted over $2.5 billion of assets under management. Two thirds of the assets are invested in equities, bonds and commodities and the remaining third are invested in alternatives, predominantly hedge funds.

Q:  What are the fundamental principles of your investment philosophy?

A :
The fund aims to deliver better risk adjusted returns over the long term by active management as opposed to delivering market returns. Additionally, we are focused on the preservation of capital while offering the potential for capital gains.

Q:  How does your philosophy translate into an investment strategy?

A :
The HSBC Absolute Return strategy aims to achieve capital growth through actively managed portfolio where assets are allocated among global equities, bonds and alternative assets. The fund has a greater emphasis on capital preservation. This diversified approach, combined with some uncorrelated assets, results in significantly lower volatility than the market.

Furthermore, our strategy offers a diversified and flexible way of investing, providing opportunity for capital growth and also trying to achieve a degree of preservation in falling markets. Most importantly, we are not constrained by a benchmark. The returns are measured against the initial investment and in absolute terms, rather than in comparison to any index.

The Absolute Return Strategy is available in the UK pound, the US dollar and the euro.

Q:  How do you conduct your investment process?

A :
We have the flexibility to invest, either directly or indirectly, in a wide range of asset classes and strategies including equities, fixed income, structured products, currencies, commodities, hedge funds, property, private equity and others. The blend of tactical asset allocation and conviction in investing helps us improve our risk-adjusted returns.

As global markets are becoming increasingly interdependent, they tend to move up and down together. Thus, the Absolute Return Strategy aims to reduce the portfolio’s correlation with the peaks and troughs of market cycles to achieve a smoother return profile. Basically, we focus on two components - return and volatility.

First of all, diversification with manageable risks reduces volatility. By diversification we mean investing in themes with different economic drivers and different behaviours, not just more shares.

Moreover, in terms of return we are essentially looking for a value and, finally, we look at assets by quality.

Q:  Could you elaborate on your investment process in more detail?

A :
We have a multi-style process that enables us to pursue five different investment styles. Each style requires an entirely different investment approach.

The first style looks for growth investment opportunity and growth means investing into the market leadership as opposed to a fast-growing country or sector. Typically that entails buying medium quality assets that are cheap.

Our second strategy seeks opportunities in quality and value and embraces those concepts simultaneously. Essentially, we want to buy high-quality assets at fair value.

The third style is based on long-term investment opportunities where we aim to buy low-quality assets that are dirt cheap.

The fourth style is about looking for liquid and uncorrelated investment opportunitIES. Here, we look for highly liquid hedge fund strategies which invest in commodities and follow macro investing themes via CTAs or global macro funds.
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