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Europe Unit Trust Manager Q&A: 
Multi Manager, Multi Markets
Author: Manish Shah
Last Update: 10:31 AM EST August 27 2007

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Nicholas Pothier
  ďAs a multi manager our job is to identify differing philosophies and approaches to investing in our submanagers and to combine those in ways which maximize diversification and reduce risk.Ē
HSBC Open Global Distribution Fund

Managed with capital preservation in mind, the HSBC Open Global Distribution Fund aims to provide a high level of income by investing in the widest possible range of asset classes across global markets. The fund manager Nick Pothier is prepared to head well off the beaten track to uncover talented sub-managers with alternative investment philosophies and to combine those in ways which maximize diversification and reduce risk.

Q: What is your investment philosophy?

A: We believe that our multi manager funds provide exposure to non-correlated alternative investment strategies and spread risk across various investment styles. Our multi-manager approach provides investors exposure to balanced investing with less than market risk.

Q: What differentiates you from your peers?

A: We focus on the qualitative side of manager research, while many multi managers would use performance and risk return screens as a primary tool for identifying managers. We believe that there are certain dangers in doing that mechanically as many of the manager databases are not current and are not an accurate representation of the fund managerís performance.

Q: What is the main advantage of the multi manager approach?

A: Investment styles go in and out of favor, managers stray from their investment styles, and industry sectors and market segments rise and fall. With the multi-manager approach investors are spreading their risk among various managers and different investment themes.

Basic modern portfolio theory tells us that combining different risks enables a better risk return payoff within the portfolio. This extends to managers style, whether itís growth or value, small cap or mid cap, or contrarian. These styles can all be combined and produce a richer mix than anyone of the components on their own and deliver a better risk return payoff over time.

Q: What is the philosophical starting point of the fund?

A: In a nutshell, our philosophy is multi asset class as we think that low correlated assets produce a very good risk return mix. There are two funds in this range. The umbrella is called Open Funds and under it are the Open Global Distribution Fund and the Open Global Return Fund.

The Open Global Return Fund is designed to be a balanced fund of funds. In the UK market, where this fund range is domiciled, things are very peer-group oriented. Most funds are benchmarked against the peer group average in terms of asset allocation and performance. The balance managed sector in which the Open Global Return fund sits within, is actually not very balanced. It tends to be a mix of equity and fixed interest and it is too skewed towards the UK market exposure. So youíd typically have 45% - 50% UK equity exposure and most fixed interest exposure would be heavily weighted towards the UK bonds.

The starting point for the Global Return Fund was to make it a multi asset class fund in which we include as many different local asset classes as possible. It uses a significant number of relatively unknown managers that are difficult for retail investors to access due to minimum investment requirements. In this way there is a little risk of duplicating a clientís existing portfolio.

The Open Global Distribution Fund which takes its philosophical lead from the Open Global Return Fund has the additional requirement of income distribution. This constraint led us to remove some of the lower yielding assets and put the emphasis on the yielding assets so it is not quite as multi asset class as the Open Global Return fund, but compared to the other yielding funds it is quite diversified. It has a wide range of asset classes via a good spread of funds which are globally invested.

Q: How is your research team organized?

A: We currently have a global team of 43 analysts based all around the world. Through our offices in London, Paris, Hong Kong, New York, and their satellites, we have a geographical spread of analysts who know managers in their local market.

We do use quantitative screens as part of our ideas gathering process but we donít emphasize it. We put emphasis on qualitative aspects of manager research to learn about the nuances of investment management approaches and the skill sets of particular managers.

Q: Could you describe your methodology for selecting a specific manager?

A: The decision has a significant judgmental component which is as forward-looking as possible. We are trying to identify a set of behaviors that the manager has and we assess their talent, experience and original thinking abilities.

Our starting point as to what investment philosophy could be of use is quite open-minded and agnostic. We donít impose any beliefs on our managers or expect a certain philosophy when we meet them for the first time. The more they differ, the better. This helps us compose diverse portfolios.

When the asset class analysts visit the manager there are always two people involved in the interview and the decision. The original idea could be the result of an analystís experience with the asset class and their view of the available managers and their histories. Job hopping among managers in the industry is quite high in London. The average tenure of our investment manager is in the region of 2_ years, so you have to know your sector and managers and read various trade journals.

At some of the larger investment houses, whose investment process is more mechanical and rules based, itís possible that thereíd be some talented manager who feels constrained and is not delivering his best. If he moves to a new investment boutique for example, and if they have a direct equity stake, then there would be an increase in motivation. So weíll visit the boutique, understand their business and the specific risks involved and decide whether to invest with them.
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