Curtain raises on world stage for HSBC

The void at the top of HSBC Asset Management has finally been filled. John Wilkinson spoke with the two new executives about their plans to make the Australian operations a key plank in the group's global strategy.

A change in the senior ranks of a fund manager often sees a radical shake-up.

So when HSBC Asset Management Australia lost its chief executive officer and chief investment officer, change was expected at the Melbourne headquarters. Stephen Babidge and David Stevens left HSBC last year to form boutique funds management business Contango Asset Management and took with them a number of senior investment executives.

Apart from the new CEO and CIO, little has changed to the external appearance of HSBC. However, the new team has subtly altered the focus from being an Australian outpost of the HSBC empire to becoming an active part of the global financial services organisation.

Incoming CEO Bob DeHart, who was previously chief investment officer of HSBC Asset Management Canada, has brought the international focus with him.

"Previously the company was not making local investors aware of the team HSBC has around the world," he says. "It really was an individual operation here."

One of the first steps in this global move is to clean up HSBC's product range in Australia and add a number of products from overseas. DeHart says these could include fixed interest and technology investments.

"In North American we have technology funds which could be introduced here, but the aim is to find the best products globally and introduce them here," he says.

Another part of this global push has seen the new chief investment officer David Stuart join HSBC's global investment group and attend the quarterly meetings.

"Australia was insular when it came to looking at global investments strategies and the economic situation," DeHart adds.

Some of the change to HSBC's Australian operations is due to the changing marketplace. With the arrival of US operations like Vanguard, which has put pressure on fees and altered the focus to global players, HSBC has had to respond.

De Hart says pressure on margins in wholesale markets is leading to HSBC looking at ways to compete. He believes quality service at competitive prices is the way forward. This has also meant that his role is now separated from the investment team to concentrate on customer service.

Previously the chief executive officer played a role in investment decision making.

DeHart sees no point in taking an organisation like Vanguard head-on over price. He believes a fund manager has to offer better additional services, such as research, to win customers.

Research has always played a fundamental role in funds management. Stuart says research is now required to be global, to match what investment markets want.

Demand for quality research is coming from the retail market which wants access to the quality product previously only enjoyed by the wholesale market.

Stuart says the quality of research in the retail market is now equal to that of wholesale. The move is a sign of the growing merger of retail and wholesale - another sign of globalisation.

The changed attitude has also meant Stuart's investment team in Australia is making inputs into the global picture being developed by the HSBC global investment group.

"We present details of Australian earnings and markets at these meetings, which are quarterly, and once a month there is a telephone hook-up around the world," Stuart says.

Being part of the team has enabled Stuart to meet with his counterparts in markets like the US -which are important to Australia.

"Australia follows the US markets so we need up-to-date information to give the investment team here the power to make decisions," he says.

Despite the global approach, HSBC Australia is still using the business cycle as its fundamental tool for its investment decisions, although

Stuart argues that the business cycle approach is a global process at HSBC.

Perhaps one noticeable change with the new investment regime at the Melbourne office will be its greater emphasis on bottom-up analysis.

"In the past we were a bit overblown with the top-down approach due to the chief investment officer also being the head of equities," Stuart says.

The role has now been divided and HSBC has recruited Wallara Asset Management director Paul Kasian as its new head of equities.

Stuart says the use of the business cycle will continue at HSBC with the use of research from London, which is the centre of HSBC global research and the use of the BCG/HOLT cashflow return on investment processes which the fund manager has used for the past four years.

The HOLT model identifies a company's ability to add value for its shareholders above the cost of capital. Kasian worked on developing the Australian model of this US investment methodology.

Stuart says the company will be making more use of the method and will be letting clients know about its merits. In the past, HSBC has kept quiet about using the HOLT model.

"The advantage of this model is it looks at the inputs of the accounting process rather than just looking at profit and loss figures," he says.

"We can clearly see a company's earnings and cash flow returns and we use that to look for value in the investment."

Another advantage of the model is that cash flows are easier to predict and tend to be more stable, giving a longer view on a particular company.

"It is a good vehicle to project returns and is a far more sensitive tool predicting value by looking at the cash flows," he says.

In addition to his role as head of equities, Kasian will be working on producing a more advanced version of the HOLT model.

The development of the model is part of the HSBC global strategy to develop centres of excellence. Stuart says Australia is a natural choice for resources work as is Canada, another resources centre in the world.

"This means HSBC operations around the world will bring in expertise, rather than replicate it in their own country," he says.

"This would see two centres, like resources in Australia and Canada, putting their efforts together to create a centre of excellence which the rest of the HSBC operations can use," he says.

The global approach to HSBC's funds management business will also enable the Australian operations to move into the retail market. Already HSBC is on the list of managers in a number of master trusts, but DeHart sees greater involvement inevitable.

"It is another part of fund managers becoming global operations," he says.

Distribution will be one of the challenges to entering the retail market, but DeHart sees use of the group's banking operations as playing an important role.

"Our sister bank, while small in Australia, is a focus for distribution and we will be forming stronger links with them," he says.