global equities - hsbc · fulfilment is to gain exposure to equity beta with cost-effective,...
TRANSCRIPT
February 2017
New approaches for investing in global equities
Global Equities
This publication is intended for Professional Clients
only and should not be distributed to or relied upon by
Retail Clients. The information contained in this
publication is not intended as investment advice or
recommendation. Non contractual document.
2
Contents
Introduction 3
Alpha-Beta divide 4
Global equity building blocks 5
Multi-Factor investing: core allocation 6
Active management opportunity 7
Active portfolio construction options 9
• Lower volatility 10
• Dividend / Income 11
• Smaller companies 12
• Real estate 13
• Thematic 14
Non-contractual document
3
Introduction
Our market outlook suggests that investors may
currently be thinking about increasing their
equity exposure. Our Global Investment
Strategy team assesses the long-term expected
returns of asset classes within our multi-asset
allocation models, to feed into our investment
strategy. These estimates are based on
dividend yield, earnings per share growth, and
market re-pricing. Our analysis suggests that
equities currently look more attractive than
developed market government bonds and cash
(Figure 1). In addition, global equities deliver an
attractive yield spread versus US 10-Year
Treasuries (Figure 2).
As investors have progressively been shifting
their equity allocations from domestic equities
towards both global equities and multi-asset
solutions, we have seen a renewed interest in
global equity strategies.
Global equity investing requires flexible
strategies that investors can tailor to their
investment objectives.
This paper reviews recent developments in
global equity investment approaches and offers
a brief description of the key asset allocation
building blocks available to investors.
Figure 1
Expected 10-year nominal returns
(annualised, USD unhedged, %)
Source: HSBC Global Asset Management as at 31 December 2016.
For illustrative purposes only and does not constitute any investment recommendation
in the above mentioned asset classes. Any forecast, projection or targets where
provided is indicative only and is not guaranteed in any way
0.0%0.0%
1.9%1.2%
2.3%
3.5%3.4%
4.2%8.2%
5.9%9.4%9.2%
4.5%5.3%5.2%5.7%
(5%) 0% 5% 10% 15%
Japan JGBGerman Bund
UK GiltsCanada 10yr Bond
US Government Bonds
US Corporate CreditEUR High Yield
US High YieldLocal EM Debt
Global listed real estateAsia ex Japan
Emerging marketsCanada
USDeveloped markets
Global
0
2
4
6
8
10
12
Oct-
95
Oct-
99
Oct-
03
Oct-
07
Oct-
11
Oct-
15
MSCI ACWI US 10-Year Treasuries
Figure 2
Yield spread
(Global equity earnings yield versus US 10-Year
Treasury yield)
Source: HSBC Global Asset Management, Bloomberg, as of 31
December 2016.
The level of yields is not guaranteed and may rise or fall in the
future. For illustrative purposes only. Any performance information
shown refers to the past and should not be seen as an indication of
future returns.
HSBC Global Asset Management, November 2016
Non-contractual document
4
Alpha-Beta divide
The objective for equity asset allocation
fulfilment is to gain exposure to equity beta with
cost-effective, efficient implementation. If one
believes equity markets are “efficient,” cap-
weighting is the optimal approach. The Efficient
Market Hypothesis suggested investors should
hold the market portfolio for equity exposure.
Cap-weighted indices became a proxy for the
market portfolio and low-cost passive
indexation became a reference for equity beta.
Equity markets, however, have exhibited
excess volatility, which can result in the
mispricing of risk. If equity markets are
“inefficient,” then active solutions and
alternative weighting schemes (smart beta
strategies) have the potential to add value.
The Alpha-Beta divide
The Alpha-Beta divide has evolved further
towards explicitly selecting and controlling
factor exposure (Figure 3). Taking a factor
perspective:
• Cap-weighted indices contain implicit factor
exposures
• The performance of traditional active
strategies could be explained as a
combination of factor exposure and “alpha”
Given that different factors outperform in
different regimes, there is a need to take explicit
control of these factors.
Alternative weighting schemes
Cap-weighted indices contain implicit factor
exposures and carry concentration risk, given
that index weights are linked to security prices.
Alternative weighting strategies are cost-
effective ways of gaining exposure to factors,
creating index weights without linkage to
security prices, yielding more stable index
weights.
Different weighting approaches exist:
• Factor weighting
• Fundamental weighting
• Equal-weighting
A systematic rebalancing mechanism to bring
index weights back to their target index weights
can capture pricing errors arising from excess
volatility, with the potential to add value over
traditional equity beta.
Figure 3
Alpha-Beta divide
Source: HSBC Global Asset Management
For illustrative purposes.
Please note that the products implementing the strategies described above may not be authorised/registered for sale in your country.
Source: HSBC Global Asset Management – December 2016.
Non-contractual document
5
Global equity building blocks
Smart Beta / Alternative Weighting Schemes
Passive
Cap-Weighted
Indexation
Active
Fundamental
Stock
Selection
Fundamental
weighting
Lower
VolatilityMulti-FactorSingle Factor
Equity fulfilment options
New approaches to investing
Investors looking to access global equity beta
or alpha-seeking strategies within global
markets now have a number of compelling
investment options to consider, spanning the
risk spectrum, for strategic asset allocation.
By highlighting the specific investment
objective, the respective investment processes
may be tailored to capture the essence of the
investment opportunity.
Subsequent pages highlight and discuss select
new developments in global equity investing.
Passive cap-weighted indexation
Low cost, efficient indexation solutions capture
equity beta across reference cap-weighted
indices
Single Factor/ Multi Factor
Our strategy ensures the selected factors are
designed to carry purified target premia with
most reliable data sources, minimal unintended
risk and least duplication among themselves.
Multi Factor strategy is a bespoke solution to
construct diversified portfolio that are exposed
to a multiple factors. It mitigates the cyclicality
of individual factors as well as the need for
factor timing.
Our Multi-Factor Equity process can be applied
to a wide range of markets and is capable of
incorporating client specific guidelines such as
tracking error, country and sector risk exposure
or ESG requirements (e.g. low carbons)
Fundamental weighting
Alternative weighting schemes, or Smart Beta,
seek to deliver excess returns over market
capitalisation-weighted indexation, by taking
advantage of excess volatility in markets.
Fundamentally-weighted strategies may be
well-positioned as a fulfilment option for a core
equity allocation.
Lower volatility
Volatility comes with investing in equities. A
lower volatility strategy aims to deliver better
risk-adjusted returns and aims to help investors
accommodate this volatility.
Active Fundamental Stock Selection
Typical stock selection strategies aim to identify
significant mispricing within the market. We
also see increasing integration of Environment,
Social, Goveranace (ESG analysis into active
investment decisions as well as a consideration
of carbon exposure and carbon intensity.
A number of portfolio construction options exist,
including
• Core
• Dividend/income
• Small cap
• Real estate
• Thematic
Please note that the products implementing the strategies described above may not be authorised/registered for sale in your country.
1 “Current topics in global equity investing”
HSBC Global Asset Management, November 2016
Non-contractual document
6
Smart Beta: Global Multi-Factor / core allocation
We believe that it is possible to outperform
capitalisation-weighted indices. However, the
concepts, economic models and tools used to
describe how markets work were designed for
efficient, rational markets. In our view this
dependence on efficient market theories is a
serious brake on designing and implementing
effective investment strategies. This makes it
critical that we apply rigorous thought to the
implementation of any investment process. A
number of concepts drawn from the academic
literature form the cornerstone of our investment
process.
HSBC’s investment approach/philosophy to
factor investing is based on the observation that
stocks, with certain characteristics, have been
shown to outperform the broader market on a
risk adjusted basis (Figure 3) . This work
leverages the broad academic literature during
the last forty years and highlights the
persistence of certain equity risk premia.
Our strategy aims to profit from these
inefficiencies by adopting a robust quantitative
approach based on financial and economic
theory. The key elements of our factor
investment process are quantitative stock
selection, robust portfolio construction and
consistent implementation with integrated risk
management.
HSBC Global Multi-Factor Equity
HSBC Global Multi Factor Equity, established in
2004 in segregated portfolios for institutional
clients, is a multi-factor equity strategy which
aims to deliver consistent outperformance
against a market capitalisation weighted index
with targeted tracking error. The strategy is
designed to provide investors with exposure to
multiple factor premiums, such as value, quality,
low risk, size and momentum. (Figures 3), and
the solution has exhibited exposures consistent
with its design parameters (Figure 4). . One of
the keys in delivering consistent
outperformance is to maintain a suitably
diversified set of small active weights against
the specified index.
Figure 3
Factor risk premia
Figure 4
Factor exposures over time
Source: HSBC Global Asset Management. For illustrative purposes.
Source: HSBC Global Asset Management, Bloomberg, Thompson Reuters, Worldscope.
September 2016.
0%
20%
40%
60%
80%
100%
Nov-1
3
Fe
b-1
4
Ma
y-1
4
Au
g-1
4
Nov-1
4
Fe
b-1
5
Ma
y-1
5
Au
g-1
5
Nov-1
5
Feb-1
6
Ma
y-1
6
Au
g-1
6
Value Quality Size Low risk Momentum
Non-contractual document
7
Smart Beta: Fundamental weighting
A fundamentally-weighted strategy can provide
investors with broad equity exposure with the
potential for outperformance.
As an example, the HSBC Economic Scale
Index (ESI) strategy weights companies based
on their economic footprint, that is, their
contribution to the global economy, as
measured by Gross National Product (GNP), or
‘Value Added’.
Weighting companies in proportion to their
economic footprint, rather than price, helps to
avoid the performance drag associated with
systematically overweighting overpriced shares
and underweighting under-priced shares
(Figure 5).
Rebalancing
Rebalancing can also be a key driver of
performance in Smart Beta strategies.
To demonstrate the value of rebalancing,
portfolio returns can be decomposed into the
sensitivity to the styles/factors identified by
Fama and French. The ‘alpha’ not attributed to
these styles/factors can be associated with
rebalancing.
Rebalancing can make a significant contribution
to the excess performance, with relatively little
exposure or sensitivity to small cap and value
factors (Figure 6). This potential for excess
return from rebalancing increases with the
volatility or ‘noise’ of the underlying market.
Return
p.a.
Excess
Return
p.a.
Volatility
p.a.
Sharpe
Ratio
HSBC
ESI
World
7.19% 1.49% 16.4% 0.34
MSCI
World5.70% 15.4% 0.26
FTSE
RAFI
Developed
1000
6.85% 1.15% 16.9% 0.31
Source: Euromoney Indices, Bloomberg, Datastream, MSCI Barra. Simulated data
calculated by the Euromoney Index Team based on weekly total returns in USD for
the period 30 June 2006 to 31 December 2016.
Based on performance back tests that assume no trading costs or fees. HSBC
Economic Scale Index data prior to 15 June 2012 is back tested (simulated) data
calculated by the independent calculation agent, Euromoney. Data subsequent to the
Index launch date has been calculated daily by Euromoney. Past performance and
back tested (simulated) data are not a reliable indication of future returns. Back
tested performance results have many inherent limitations and were achieved with
the benefit of hindsight by means of a retrospective application of the HSBC
Economic Scale Index rules based methodology to determine the appropriate
weightings. The results do not represent the results of actual trading using client
assets and as such do not include any dealing costs that may be incurred by funds
tracking an Index. No representation is being made that the Index will or is likely to
achieve results similar to those shown. In fact, there are frequently sharp differences
between back tested performance results and actual results subsequently achieved.
Index data prior to 15 June 2012 is back-tested (simulated) data calculated by the independent calculation agent, Euromoney Indices. Data
subsequent to the Index launch date has been calculated daily by Euromoney Indices. Past performance and back-tested (simulated) data are
not a reliable indication of future returns. Back-tested performance results have many inherent limitations and were achieved with the benefit of
hindsight by means of a retrospective application of the HSBC Economic Scale Index rules-based methodology to determine the appropriate
weightings. The results do not represent the results of actual trading using client assets and as such do not include any dealing costs that may
be incurred by funds tracking an index. No representation is being made that the Index will or is likely to achieve results similar to those shown.
In fact, there are frequently sharp differences between back tested performance results and actual results subsequently achieved. Source:
Datastream, data (using weekly total returns in GBP with gross dividends re-invested) from 11 July 2001 to 30 September 2016.
Value of RebalancingOverall
excess return
Potential
rebalancing
‘Alpha'
Market
beta
Small-
cap
beta
Value
beta
Tracking
error
HSBC ESI Emerging Markets 3.57% 3.45% 0.98 0.04 0.33 3.71%
HSBC ESI Worldwide 1.81% 1.21% 1.00 0.25 0.29 2.81%
HSBC ESI World 1.41% 0.91% 1.00 0.22 0.27 2.75%
Figure 5
Performance of fundamentally-weighted
strategies
Figure 6
Value of rebalancing
50
100
150
200
250
300
Jun
-01
Jun
-03
Jun
-05
Jun
-07
Jun
-09
Jun
-11
Jun
-13
Jun
-15
HSBC ESI World
MSCI World
FTSE RAFI Developed 1000
Non-contractual document
8
Lower volatility strategies aim to deliver
improved risk-adjusted returns relative to the
reference cap-weighted benchmark.
Lower volatility strategies typically offer a
smoother performance pattern and lower
drawdowns. This can lend investors confidence
in funding obligations and provide the capacity
to stay invested with less likelihood of triggering
a de-risking decision. From an asset allocation
perspective, lower volatility aims to soften the
impact of equity on overall portfolio risk and can
allow or balance a tactical allocation to more
aggressive, higher volatility strategies.
At the end of June 2016, the MSCI ACWI
Minimum Volatility Index appeared expensive
relative to the profitability delivered, given the
construction of the index does not consider
stock valuation and low volatility stocks appear
expensive (Figure 7), but premium valuation
corrected dramatically in the second half of
2016. The index is also skewed towards
defensive sectors (i.e. consumer staples, health
care, telecommunications and utilities), about
twenty percentage points overweight compared
to the standard index.
Investors may be better served in considering a
lower volatility approach that considers
valuation, illustrated in Figure 8. Such an
approach would look first a set of attractive
investment opportunities. Minimum variance
optimisation would then be applied to lower
portfolio volatility by combining low volatility
names with higher volatility diversifiers. This
methodology creates a portfolio of attractive
investments and lower volatility, helping to
avoid crowded trades, sector overconcentration
and potentially interest rate sensitivity.
Figure 7
Profitability-Valuation of MSCI ACWI
Minimum Volatility index
(Return on Equity, Price-to-Book)
Quarterly data, Sep 2012 – Dec 2016
Source: HSBC Global Asset Management, Bloomberg as of 31 December 2016.
For illustrative purposes. Any performance information shown refers to the past
and should not be seen as an indication of future returns.
2.0
2.2
2.4
2.6
2.8
3.0
12 14 16 18 20
Price-t
o-B
ook (
x)
Return on Equity (%)
Dec 2016
0%
25%
50%
75%
100%
0 5 10 15 20 25
Holdings Universe
Dots represent individual stocks within the MSCI ACWI universe.
Representative overview of the investment process, which may differ
by product, client mandate or market conditions.
Source: HSBC Global Asset Management
For illustrative purposes. Any performance information shown
refers to the past and should not be seen as an indication of
future returns.
More
attractive
Less
attractive
Lower HigherStock volatility (%)
Investm
ent
att
ractiveness
25%
20%
15%
10%
5%
0%
Figure 8
Portfolio construction focus on investment
attractiveness
Smart Beta: Lower Volatility
Jun 2016
Please note that the products implementing the strategies described above may not be authorised/registered for sale in your country.
Source: HSBC Global Asset Management – December 2016.
Non-contractual document
9
Active managers aim to invest in a broadly
diversified set of high conviction opportunities.
We see a clear opportunity for active managers
to add value in stock selection.
The global equity universe offers active
managers access to a greater number of
potential investments, and the opportunity to
select the best investment ideas (Figure 9).
Geographic boundaries can pose artificial
constraints around investment decision-making
and implementation.
A global perspective prioritises company
fundamentals over domicile. For example,
Samsonite, a luggage manufacturer and retailer,
is listed in Hong Kong, as is Prada, the Italian
luxury goods company. Pacific Rubiales, an oil
exploration and production company, is listed in
Canada yet its operations are primarily in
Colombia.
The breadth of investment opportunities across
sectors, countries and themes allows managers
to reflect relative preferences.
Return dispersion confirms active
opportunity
Fundamentally, the complex interrelationships
and changes within the global economy and the
competitive dynamics of industries can lead to
differing views over the future outlook of
individual companies. This controversy can lead
to security mispricing and a potential investment
opportunity that can be confirmed by
fundamental research.
Ex-post, the dispersion of one-year returns
confirms that stock selection has the potential to
add value (Figure 10).
Active management opportunity
Figure 9
Stock selection opportunity
-100
0
100
200
300
400
500
Figure 10
Dispersion in global equity returns
(Individual stock one-year return, %)
Source: HSBC Global Asset Management, Bloomberg as of 31
December 2016.
Data shown is gross and the effects of commission, fees and other
charges will reduce the overall return.
For illustrative purposes. Any performance information shown
refers to the past and should not be seen as an indication of
future returns.
Global World
Stocks 2486 1654
Countries 46 23
Sectors 11 11
Source: HSBC Global Asset Management,, MSCI as at 30 December 2016.
For illustrative purposes.
Non-contractual document
10
Market structure supports stock selection
The global universe facilitates relative choice;
the universe contains businesses operating
within a breadth of sectors and sub-sectors and
across a number of countries. This matrix
provides a framework from which preferences
can be expressed. This does not exclude the
possibility that the best investment ideas could
come from the confines of a single region or
country, but it follows logically that investors
would be better placed if offered a larger choice
set, provided they have the framework, process,
tools and resources to evaluate the larger
universe.
Today, we see dispersion in the relationship
between Profitability and Valuation (Figures 11
and 12), indicating a potential investment
opportunity that could be confirmed through
proprietary fundamental research..
Inherent evolution of portfolio exposures
Importantly, global equity portfolio sector and
regional exposures can evolve over time as
investment opportunity and conviction change.
The active manager can use stock selection to
drive strategic and tactical allocation, versus
using a top-down perspective. For example, if
consumer staples or German equities become
overvalued, an active strategy could decrease
portfolio weight in those areas in favour of other
more attractive areas of the market.
0%
10%
20%
30%
0 10 20 30 40 50
EB
IT/E
nte
rprise v
alu
e
Return on Invested Capital (%)
Source: HSBC Global Asset Management as of 31 December 2016.
For illustrative purposes. Any performance information shown
refers to the past and should not be seen as an indication of
future returns.
Figure 12
Dispersion in Profitability-Valuation
(Return on Invested Capital and EBIT Yield)
0
2
4
6
8
0 10 20 30 40 50
Price-t
o-B
ook (
x)
Return on Equity (%)
Source: HSBC Global Asset Management as of 31 December 2016.
For illustrative purposes. Any performance information shown refers to the past
and should not be seen as an indication of future returns.
Figure 11
Dispersion in Profitability-Valuation
(Return on Equity and Price-to-Book)
Non-contractual document
11
Active portfolio construction options
Investors have typically based their active
investments around Core strategies that aim to
outperform the reference cap-weighted
benchmark.
Investors now have the option to access
strategies that are constructed to meet specific
investor objectives (Figure 13). How these
objectives are delivered should be an important
consideration for investors.
Lower volatility strategies aim to deliver
improved risk-adjusted returns relative to the
reference cap-weighted benchmark. Investors
may consider such strategies as Smart Beta or
a type of active stock selection.
Dividend / Income: strategies aim to
outperform the reference cap-weighted
benchmark with a higher yield than the
reference benchmark.
Smaller Companies strategies aim to
outperform the reference small cap benchmark.
Real estate equities offer liquid and relatively
efficient access to global property.
Thematic strategies aim to invest in secular,
global trends, where change drives growth
potential.
Lower
VolatilityThematicCore Income
Smaller
CompaniesReal Estate
Figure 13
Active portfolio construction options
Please note that the products implementing the strategies described above may not be authorised/registered for sale in your country.
Source: HSBC Global Asset Management – December 2016.
Non-contractual document
12
Dividend / Income: strategies aim to
outperform the reference cap-weighted
benchmark with a higher yield than the
reference benchmark. In a low interest rate
environment, investors may seek new avenues
beyond fixed income to fulfil their income
requirements. Regular investment income can
help meet recurring expenses. Income
generation can provide a steady cash flow
stream for the investor as opposed to producing
income from capital alone.
Currently, the MSCI ACWI High Dividend Index
appears expensive relative to the profitability
delivered, given the construction of the index
does not consider stock valuation (Figure 14).
We believe investors should focus first on
investment attractiveness, not dividend yield.
Our analysis suggests there is a trade-off
between portfolio return potential and portfolio
yield, which is an important consideration for
investors focused on total return (Figure 15). In
addition, risk exposures could increase higher
yielding names have similar factor exposures.
(Figure 16).
Portfolio managers can then utilise portfolio
construction tools to construct income portfolios
that balance total return, dividend yield and risk
factor exposures (Figure 17).
.
Figure 14
Profitability-Valuation of MSCI ACWI High
Dividend index
(Return on Equity, Price-to-Book)
Quarterly data, Sep 2012 – Dec 2016
Source: HSBC Global Asset Management, Bloomberg as of 31
December 2016. For illustrative purposes. Any performance
information shown refers to the past and should not be seen as
an indication of future returns.
1.4
1.6
1.8
2.0
2.2
2.4
12 14 16 18
Price-t
o-B
ook (
x)
Return on Equity (%)
Dividend
yield
Risk
exposures
Return
potential *
Figure 17
Dividend / Income portfolio construction
Source: HSBC Global Asset Management as of 31 December 2016.
For illustrative purposes. Representative overview of the investment
process, which may differ by product, client mandate or market
conditions.
Dec 2016
Source: HSBC Global Asset Management, - Dec. 2016
Figure 15
Relationship between portfolio return
potential and dividend yield
Portfolio yield relative to market yieldHigherSimilar
Higher
Lower
Retu
rn p
ote
ntia
l
(Port
folio
avera
ge s
tock r
ank)
Figure 16
Relationship between portfolio risk
exposure and dividend yield
Source: HSBC Global Asset Management – Dec. 2016.
For illustrative purposes.
Portfolio yield relative to market yieldHigherSimilar
Higher
Lower
Active r
isk e
xposure
Dividend / Income
Non-contractual document
13
Smaller Companies strategies aim to
outperform the reference small cap benchmark.
We believe stock selection has the potential to
improve returns over passive small cap
exposure, particularly where regional
fundamental insight is evident.
Such strategies can be considered as
standalone tactical allocation or as part of a
regional fulfilment alongside traditional large
cap strategies.
Figures 18, 19 and 20 show how respective
Small-Mid Cap or Small Cap indices have
performed versus their large cap counterparts
over ten years. While volatility has generally
been higher, excess return has meant that
Smaller Company strategies have generally
delivered higher Sharpe Ratios.
Figure 18: Europe
(10 years to 30 Dec 2016)
Source: HSBC Global Asset Management, MSCI as at 30
December 2016. USD returns gross of fee. Data shown is gross
and the effects of commission, fees and other charges will reduce
the overall return. For illustrative purposes only. Any performance
information shown refers to the past and should not be seen
as an indication of future returns.
0
1
2
3
18 20 22 24
Annualis
ed r
etu
rn (
%)
Volatility (%)
Figure 19: European Union
(10 years to 30 Dec 2016)
-1
0
1
2
3
20 22 24 26
Annualis
ed r
etu
rn (
%)
Volatility (%)
Figure 20: Asia ex Japan
(10 years to 30 Dec 2016)
2
3
4
5
20 22 24 26 28
Annualis
ed r
etu
rn (
%)
Volatility (%)
Source: HSBC Global Asset Management, MSCI as at 30
December 2016. USD returns, gross index, gross of fee. Data
shown is gross and the effects of commission, fees and other
charges will reduce the overall return. For illustrative purposes only.
Any performance information shown refers to the past and
should not be seen as an indication of future returns.
Source: HSBC Global Asset Management, MSCI as at 30
December 2016. EUR returns gross of fee. Data shown is gross
and the effects of commission, fees and other charges will reduce
the overall return. For illustrative purposes only. Any performance
information shown refers to the past and should not be seen
as an indication of future returns.
Europe
Europe SMID
EMU
EMU Small
Asia ex JapanAsia ex Japan
Small
Smaller Companies
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14
0.0
0.2
0.4
0.6
0.8
1.0
0 9
18
27
36
45
54
63
72
81
90
99
108
117
Corr
ela
tio
n
Holding period (months)
UK property
equities versus
UK equities
UK property equities versus
UK direct property
Source: FTSE EPRA/NAREIT, IPD, HSBC Global Asset
Management. FTSE All Share, GPR UK TR Index (Dec 1989 – 30
November 2016). Any performance information shown refers to
the past and should not be seen as an indication of future
returns.
Figure 21
Real estate diversification potential
Source: HSBC Global Asset Management, Bloomberg as at 31
December 2016. USD returns gross of fee. Data shown is gross
and the effects of commission, fees and other charges will reduce
the overall return. Any performance information shown refers to
the past and should not be seen as an indication of future
returns.
Figure 22
Annualised return difference
(FTSE EPRA/NAREIT Developed less MSCI ACWI)
Figure 23
Dividend yield difference
(%, FTSE EPRA/NAREIT Developed less MSCI ACWI)
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%
Dec-0
1
Dec-0
3
Dec-0
5
Dec-0
7
Dec-0
9
Dec-1
1
Dec-1
3
Dec-1
5Three-year Five-year
0
1
2
3
4
5
Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15
Source: HSBC Global Asset Management, Bloomberg as at 31
December 2016. USD returns gross of fee. Data shown is gross
and the effects of commission, fees and other charges will reduce
the overall return. Any performance information shown refers to
the past and should not be seen as an indication of future
returns. The level of yields is not guaranteed and may rise or fall in
the future.
Real estate equities offer liquid and relatively
efficient access to global property, including
companies operating in clusters such as office,
industrial, residential, shopping centres, health
care, self storage and data storage.
Over long-term holding periods, listed real
estate equities may be more strongly correlated
with direct property and weakly correlated to
overall equities, so they can be a diversifying
build block for asset allocation and multi-asset
fulfilment (Figure 21).
Recently, Real Estate has been classified as an
eleventh sector in the Global Industry
Classification Standard (GICS) categorisation,
upgrading the universe from a sub-sector within
the Financials sector.
Real estate equities, as represented by the
FTSE EPRA/NAREIT Developed index, offer
the prospect of income growth and capital
appreciation over the long term (Figure 22) and
historically have offered a yield that has been
higher than general equities (Figure 23).
Real Estate strategies aim to access the long
term performance characteristics of income-
producing real estate through listed equities.
About 60% of the universe by market
capitalisation is comprised of companies with
higher liquidity, a larger proportion of recurring
income and relatively low leverage (Figure 24)
Figure 24
Income-generating properties
(% of universe by market capitalization)
Source: HSBC Global Asset Management, Bloomberg as at 31
December 2016. USD returns gross of fee. Data shown is gross
and the effects of commission, fees and other charges will reduce
the overall return. Any performance information shown refers to
the past and should not be seen as an indication of future
returns.
0%
20%
40%
60%
80%
100%
• Liquidity and scale:
top 40% by
market cap
• Recurring income: EBITDA
margin >50% on 1-year or 3-
year basis
• Leverage: Debt-to-enterprise
value <50%
Other
Real Estate
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15
Source: FTSE Russell, FTSE LCE Project, December 2015. For illustrative purposes only. Any forecast, projection or target where provided
is indicative only and is not guaranteed in any way.
Figure 25
Transition to a low carbon economy
Thematic strategies aim to invest in secular,
global trends, where change drives growth
potential. As an example, climate change is a
theme that has significant investment
implications. The global commitment to
managing global temperature increase may
bring an industrial transition to a low carbon
economy (Figure 25) that could impact
companies across all sectors, creating
opportunities and risks as well as winners and
losers (Figure 26). Companies that consider this
transition within their corporate strategy should
be better placed to maintain or enhance their
competitive position, with the potential to deliver
sustained or improving profitability in the future.
The decision of United States and China to
formally ratify the Paris climate change
agreement underscores strong institutional
support for this transition.
Over 70 countries have ratified the agreement,
accounting for over 55% of emissions. The
agreement enters into force in early November
2016.
This transition to a low carbon economy could
entail new technologies and services, and it
could also lead to new regulations on carbon
emissions (Figure 27). Since carbon exposure
may have the potential to determine winners
and losers within industries, investors are also
increasingly concerned with a company’s
carbon emissions (CO2 equivalents) and
carbon intensity (emissions per unit of revenue),
given the opportunities and risks posed by this
transition.
As asset managers sign the Montreal Carbon
Pledge, committing to report investment
portfolio carbon exposure, carbon could begin to
influence investment attractiveness.
Thematic
Source: HSBC Global Asset Management
Figure 26
Opportunities and risks
Opportunities Risks
• Consumer
demand
• Technology
innovation
• Government
policy
• Changes in
demand
• Government
policy
• Litigation risk
• Physical risk
Source: London School of Economics, Goldman Sachs
Investment Research, 30 November 2015.
Figure 27
Number of national laws and regulations
related to CO2 emissions
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16
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