HSBC funds of funds eye emerging markets

LONDON (Reuters) - Emerging markets will provide the best return for equity investors in the long term, says the manager of two HSBC funds of funds, who is overweight in the category.

"We want to capture the benefit of the emerging consumer," Nick Pothier told Reuters.

"That will be the second wave for emerging markets. The first wave was really about manufacturing -- the second wave is likely to be about people in emerging markets starting to consume, aiming for the same material standard of living as those in the West."

Pothier manages the HSBC Open Global Return Fund, and the HSBC Open Global Distribution Fund, both launched in November 2006, sized at 119.9 million and 141 million pounds, respectively.

They have several common investments, though the latter puts more of an emphasis on being able to make distributions.

The Return Fund fell 8.1 percent in the year to May, while the Distribution Fund fell 11.3 percent. Both funds are benchmarked against the Investment Management Association Cautious Managed sector, which fell 13.2 percent, giving the funds rankings of 35th and 56th position, respectively, out of 127.

Pothier said emerging markets are about 15 percent of equity markets worldwide, depending on the definition of emerging markets used, but he was double that weighting.

He invests in First State Global Emerging Markets, JPMorgan's JPM Emerging Markets Alpha Plus and the Imara African Opportunities Fund to gain this exposure.

However, Pothier stressed the importance of a diversity in asset classes. The Distribution Fund has 34.7 percent in global equity, while the Return Fund has 24.1 percent.

Pothier explained that the recent higher yields on equities had helped to fulfil the need for a higher yield within the Distribution Fund.

At launch, equities had not been such a high proportion of the Distribution Fund, at around 30 percent

BOOSTS CORPORATE BONDS

Global high yield debt accounts for 30.4 percent of the Distribution Fund and 19.7 percent of the Return Fund.

Pothier bought into corporate bonds last year when their valuations were "compelling".

"The major part of it was liquidity issues when people had to sell. Some had to sell any assets they could to meet their obligations. Lots of solid companies got sold down - it was a good opportunity to invest in these funds."

Pothier invests in the M&G and Perpetual Corporate Bond funds.

Both the Return Fund and Distribution Fund have the HSBC Sterling Liquidity Fund, where they pay a lower fee as it is in the HSBC Group, as their top investment, accounting for 15.8 percent and 18.3 percent, respectively.

However, only one other HSBC fund features in the top 10 of Return, and Distribution has no others.

In October, during last year's stock market plunge, the cash element of the Distribution Fund peaked at nearly 40 percent, while the Return Fund peaked at 24 percent.

"It was quite extreme, but it helped to preserve capital," said Pothier. The cash element is now around 11 percent, and he aims to reduce it."

He insisted: "We will always invest in all of our major asset classes. Our primary role is to capture the benefits of a diversified approach, not to go charging out of asset classes.

"And we're not about making frequent tactical calls... We have a rolling five-year investment horizon. We don't enter into much discussion on what's happened in the last month."

(Editing by Simon Jessop)