Understanding the HSBC enigma

HSBC Asset Management was one of the darlings of the Australian funds management industry during the 1990s. But by the turn of the century, it was in trouble with serious outflows and a general lack of direction.

When chief executive officer Barry Sheehan joined the company three years ago, he knew that turning the operation around was going to be a big challenge.

“I had quite a number of issues with the business — which was an enigma,” he says.

“We faced three choices for the future. One was to put a ribbon around it [HSBC Asset Management]. Two was to buy something and three was to knuckle down on building a healthy base to grow.”

Sheehan chose the third option, although he admits the company was distracted when BT and Rothschild came up for sale.

The company spent many months weighing up the options of buying a business, and the London office backed the move, but left the final decision to Australian management. Sheehan said no, as he felt the local business wasn’t the correct one to become involved in the integration of a takeover target.

“We were comfortable with that decision,” he says. “HSBC is committed to the Australian operation for the long-term, as Australia is a very attractive market.”

The first year of Sheehan’s reign was committed to rebuilding the business.

“I looked at the quality assets we had, and the quality asset was property,” he says. “I had some good people and some good investment capabilities.

“We now have a business that is profitable, clean and has got a cross-section of investment capabilities that are attractive to the market. The business is now fully resourced and we have a growth plan,” Sheehan says.

The target for HSBC is to have $7 billion of funds under management (FUM) by 2007.

There is a sense of déjà vu. In 1997, HSBC had $5.6 billion of FUM, which had slipped to $2.6 billion during the rebuilding process. Today the company has $3.6 billion of FUM.

Sheehan says the funds management business was like a jigsaw. All the parts were there, they just had to be assembled into the complete picture.

“We had to re-engineer the growth part of the business,” he says. “We found more efficient means of providing non-core services, and that takes a lot of cost out of the business.”

The next stage was to optimise the capability of the decision-making process, Sheehan says.

“That meant we needed new leadership in the funds management area,” he says. Paul Kasian left and Jon Taylor joined as the new chief investment officer.

“Within half an hour of meeting Jon, I knew I had a new chief investment officer,” Sheehan says. “His style and team management style was aligned with mine.”

Taylor joined HSBC from another global fund manager, UBS, where he was chief investment officer, a position he has also held at Commonwealth Funds Management and Yasuda Kasai Brinson in Tokyo. He has also worked at Westpac and Manufacturers Hanover Trust.

This was the final piece of the jigsaw. Sheehan says Hong Kong and London, his joint masters, were happy with the re-alignment of the business and the implementation of the new structure.

“We now go forward with an army of support,” he says.

Growth is to come organically. Although Sheehan hasn’t ruled out acquisitions, it is not a priority move.

“We don’t want to go out and buy anything,” he says. “We have got assets and a large stakeholder, the only thing that constrains us is the timelines of the market. If an interesting company comes up, we will look at it, but there isn’t really anything we need.”

Sheehan says the Australian operation is now in the early stages of phase two of development and Taylor has implemented the investment strategy of the funds management business.

Taylor says when he thought about joining HSBC, its global funds management capability was an attraction.

“Globally, HSBC has US$200 billion of funds under management and that is critical mass,” he says. “Therefore, it was in Australia we looked to growing that global business and ensuring it happens.”

Taylor says he found a strong commitment to the company’s investment culture in Melbourne.

“There were a lot of good investment people. Most had come from successful firms and were a success in their own right.”

Being a member of a global funds management team is important, Taylor says.

“If you think about the Top 50 companies in Australia, they are all global multi-nationals. So you need to know how they relate to their global peers,” he says.

Taylor is the global co-ordinator of HSBC’s research team and explains how the research teams dotted around the globe work together.

“It is not about one or two teams working in isolation, we are co-ordinating all our research.”

HSBC is a business cycle manager, which means its investment selection is based on where an asset is in its cycle, according to Taylor.

“By working top-down, we can see where a stock is in the cycle. We also critically review when modelling and analysing stocks, such as the oil price and its impact on Qantas,” Taylor says.

“We think the business cycle is very powerful and can’t be ignored. Even though we think about the macro picture, we are still looking at the key drivers and the dynamics of the company.”

Taylor says to be able to undertake this level of research, you need a good team of analysts and portfolio managers.

Another move made by Taylor was to tighten up portfolio construction.

“We want to make sure any risk we take in a portfolio has to be consummate with the upside,” he says.

Taylor says one of the things their fund managers do well is assess the risk and pay-off and what benefits it will bring to a fund.

“By calculating the risk environment, it has delivered us top-quartile active returns for the last three quarters,” he says. “We have done a lot of stock selection and sector tilts [in Australian equities].”

The same model is now being applied to international equities, which Taylor says, is still in the bedding-down stage.

“We now have a global investment process, and Australia was instrumental in that process. Our analysts are currently offshore training people up in this investment process.”

Sheehan says this year HSBC has been introducing its revised Australian equities products back into the market with minor FUM targets.

“Having said that, we are already ahead of the target and we are expecting excellent results for the next quarter,” he says.

In HSBC’s funds management operation, its property funds have been the saviour for the company, enjoying strong inflows while other parts of the business were restructured.

There are two property funds — one investing in listed property trusts and the other in direct property. The direct fund currently has $600 million of assets.

The fund manager has steered clear of unlisted property trusts, but Taylor admits they have considered it.

“We have noted an appetite for a development fund, but we have to think about where we are in the property cycle,” he says.

HSBC owns no distribution and Sheehan says their strategy is to target wholesale and retail platforms at the adviser level.

“The focus is on meaningful distribution and what is the right space to be in,” he says. “We are clearly leveraging off the HSBC brand, but we now have a good mix of smart, capable people who are the drivers to make things happen.”

Sheehan says the teams at the Australian funds management operation now have the cultural background of working for a global manager.

“The cultural background is very important, more than the technical background, which we can fix,” he says.

“I can quickly get someone up to the technical level of their position, but I can’t change the culture of someone if they don’t think like the rest of the team.”

The industry will now watch with interest to see if the three years of work on the culture of HSBC’s Australian operation returns it to advisers’ favour.