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Lazy investing with HSBC’s World Index Portfolio

The last word in passive investing has to be an index tracking fund of funds. Prise the lid off one of these la-Z-Boys and you’ll find a portfolio of index trackers nestling inside like a Russian doll.

This means you can buy just one low-cost fund and – hey presto – instant diversification across all the major asset classes. Meanwhile, all those bothersome asset allocation and rebalancing decisions are automatically taken care of by someone else.

It’s a complete meal solution delivered by intravenous drip. Once you’ve set up the direct debit you barely need to remain conscious to manage it.

If that sounds like your thing, then we’ve previously recommended Vanguard’s excellent LifeStrategy fund of funds range. But since then HSBC has waded in with its rival World Index Portfolio offering.

Choices? Sounds like the kind of work a lazy investor can do without. So let Monevator do the hard yards for you…

A fund of funds - passive investing style

Snooze wisely

HSBC offer three excitingly passive fund of fund varieties:

Fund name Equity/Bonds & Cash TER
World Index Cautious Portfolio C 25:75 0.57%
World Index Balanced Portfolio C 60:40 0.59%
World Index Dynamic Portfolio C 80:20 0.64%

As you’d expect, the sliding scale of equity to fixed income and cash aims to hitch investors up with a fund to match their risk tolerance and growth expectations.

For example, if the violent bucking of the stockmarket makes you feel sick like a rollercoaster ride, then the Cautious fund is most likely to be your bag.

To be frank, this kind generic approach will probably fit you about as well as shoes that come in small, medium, or large, but it is standard practice.

More eye-catching are those bloated Total Expense Ratios (TER). They’re far higher than Vanguard’s. Even the fact that there are no upfront charges or dealing fees for the World Index Portfolios doesn’t seal the deal for HSBC, unless your contributions are very small and your time horizon is very short.

Coma coma coma chameleon

So does the HSBC fund of funds work harder for its higher TER?

Well, it certainly offers more elaborate asset allocation. Unlike Vanguard, the World Index has fingers in the property and commodity pies, not to mention foreign and high-yield bonds.

The fixed income allocation for the World Index Balanced Portfolio breaks down like this:

Asset Class Allocation
UK Gilt 13.9%
UK Inflation Linked Bond 1%
US Bond (hedged) 6.4%
Global Corporate Bond (hedged) 4.4%
Global High Yield Bond 3.1%
Emerging Market Debt 3.3%
Cash 4.7%

Personally, I prefer much more inflation protection in my fixed income allocation. The 1% in UK inflation linked bonds is a token at best.

I also expect my bonds to provide my portfolio with stability, so I’m happy to live without the risk of corporate bonds, emerging market debt, and high-yield junk – even if that means lower overall returns.

The equity, property and commodity divvy-up looks like this:

Asset Class Allocation
Global Equity (hedged) 1.1%
US Equity (hedged) 12.3%
Europe Equity (hedged) 10.9%
UK Equity 12.2%
Japan Equity (hedged) 6.3%
Asia Pacific ex Japan Equity (hedged) 3.4%
Emerging Market Equity 9%
Property 3.7%
Commodities 4.3%

I’d think twice about bearing the extra expense of the World Index Portfolio funds just to get the sliver of property and commodities on offer here. The extra diversification isn’t going to make much difference when each asset class is worth less than 5% of the overall portfolio.

US equity holdings are also pretty low in comparison to a global total market portfolio that would devote more like 50% to the American economy. By contrast, the Emerging Market tilt is fashionably high.

Of course, I’m the kind of investor that wants control over my own asset allocation, whereas a fund of funds is designed for people who keel over at the very thought.

But I don’t think the ornamentation of the World Index Portfolios is worth the expense, unless brochure talk about “in-house quant-based optimisation processes” helps you sleep at night.

It’s also interesting to note that even HSBC confesses: “The finessing of a multi-asset allocation model is as much an art as it is a science.”

Amen.

Crude awakening

The contents of a World Index Portfolio are mostly the regular HSBC index funds and ETFs that you can buy as separates, if you’re more active than a Koala who’s given up Eucalyptus leaves for Lent.

HSBC will also use other firms’ products to cover certain asset classes – e.g. there’s a Lyxor commodities ETF in the mix.

Other noteworthy features include:

  • Asset allocations are reviewed annually, so watch out for any changes you’re not comfortable with.
  • The cruder risk tolerance choice makes the World Index funds harder to lifestyle than Vanguard’s LifeStrategy funds.
  • The Balanced Portfolio fund size has nearly halved from an opening £5 million to £2.67 million in five months. Not a great sign. Vanguard’s equivalent LifeStrategy 60% Equity fund sits around £8 million.
  • The funds are not UCITS products, they are Non-UCITS Retail Schemes (NURS). This enables them to invest in property and commodities and unapproved securities (up to 20% of the fund’s value) among other things.
  • HSBC mentions that the fund’s can invest in private equity although it won’t dabble in hedge funds.

Time for bed

The big problem I have with the World Index Portfolios is the lack of a published index to benchmark them against.

The whole point of passive investing is to gain the market’s return by using low-cost index funds. If you don’t know what index your fund is meant to track, then you have no sound way of judging its performance.

For my money, HSBC’s World Index fund of funds is over-elaborate, expensive and, too opaque in comparison to its Vanguard rival. Fail.

Take it steady,

The Accumulator

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{ 13 comments… add one }
  • 1 YetToInvest April 12, 2012, 1:17 am

    I recently discovered this blog and have spent a great deal of time over the past few weeks reading it, thereby learning a great deal about a subject that had hitherto seemed largely mysterious to me.

    Over the next year or so I intend to start investing via index trackers. The HSBC funds in question caught my eye as an interesting option, but having read your review, it seems that there are better alternatives out there.

    I do have one question, though. The TER for these funds is c.0.80. If I was to create my own diversified portfolio of index trackers (say, using the funds mentioned in this article: http://monevator.com/2011/01/06/passive-investing-model-portfolio/) wouldn’t they in total have a much higher TER?

    My assumption is that they would, since I’ve added all the management fees of the funds up. Or am I missing something?

    In any case, I think this is a great blog and that both The Investor and yourself are to be commended for all the effort you put into these articles.

    Best wishes! 🙂

  • 2 AnAdmirer April 12, 2012, 7:17 am

    Thanks very much for writing up your thoughts on this new HSBC product. I was very interested to see what you’d make of it when I first spotted it about a month or ago. A clear thumbs down then!

    The main thing that put me off was the high TER, as spotted.

    I think HSBC have tried to be too clever here and moved too far forward into structured portfolios too early. It’s almost a quasi-managed fund. I am glad they recognise the market for index portfolio funds but they need to go back to the drawing board to build the product I feel.

    I would buy a really simple portfolio structure that was e.g. UK Gilt + FTSE + All World and rebalanced between for the right price (0.3-0.5%). Remove all the ETF/commodity/property/hedged stuff.

    In fact, HSBC would do much better just to release an All World ex-UK tracker for their same famously low TER (~0.3%); this alone is a more useful/cheaper product than these portfolio products and saves the individual investor trying to juggle 5 different HSBC developed market funds (US, UK, Europe, Pacific, Japan) separately otherwise to get the same exposure – been there, tried that, and wouldn’t do it again – just too much leg work/risk for the lazy investor like me. Buy Vanguard instead.

    I am happy to pay a premium for rebalancing – it’s one less risk/headache for me and is another big advantage of Vanguard LifeStrategy that no other competitor seems to have yet grasped.

    – Low costs
    – Simple structure; small number of moving parts.
    – Automatic rebalancing.

  • 3 Dave April 12, 2012, 10:26 am

    The HSBC Balanced fund looks quite like the Vangard Lifestrategy 60 fund with a lower UK equity fund being offset by a small property and commodity slice. The bonds/gilt part of the pie is much riskier with some high yield and foreign debt in there.

    I am not sure why Global High Yield Bonds and Emerging Market bonds are not hedged, as presumably that increases their volatility. The corresponding equity part is hedged. I am not really sure as to why?

  • 4 Robert April 12, 2012, 3:42 pm

    @YetToInvest

    To calculate your effective TER you multiply your allocation ratio by its TER and sum,

    so you have (using the figures from the link)

    UK 20% 0.27% 0.05%
    US 27.50% 0.28% 0.08%
    EU 12.50% 0.37% 0.05%
    JP 5% 0.28% 0.01%
    PA 5% 0.37% 0.02%
    EM 10% 0.99% 0.10%
    GL 20% 0.25% 0.05%

    Total 0.3588%

  • 5 Alex April 12, 2012, 3:45 pm

    1. TA, I can only agree with your assessment. Those TERs are too high –disappointing in light of the low-cost HSBC Index Tracking Funds and ETFs. Cheeky, as well: using those same low-cost funds within these new products, as you say.

    2. HSBC might decrease those TERs when/if the new funds reach a certain size? Tad optimistic…

  • 6 Drew April 12, 2012, 6:30 pm

    Yes it’s a shame about that TER. The fund looks like it would suit my requirements as a small fry UK investor, unable to tap into Vanguard’s range. If only that TER was lower!

  • 7 The Accumulator April 14, 2012, 11:02 am

    @ YetToInvest – Thanks for your comment. Robert is spot on. You have to take into account the pound weighted average of each fund’s TER on your total portfolio. Thanks Robert for taking the time.

    @ AnAdmirer – Agreed the cleverness seems to be a justification for the higher fees. I would like to see an all-in-one fund option include property and commodities though, those are useful diversifiers. Love the idea of bundling up those HSBC separates into a Developed World excluding UK party pack. That would make life much simpler.

    @ Dave – Yes, presumably the fees would climb even higher. And junk bonds and emerging market debt is likely to add volatility that I don’t want to add to my bond component anyway.

    @ Alex – although to be fair, you get some saucy talk about the “in-house quant-based optimisation process” in the brochure.

    @ Drew – there is a Fidelity equivalent out there too. I haven’t gotten around to looking at it yet, but will do at some point. Might be worth your while digging it up.

  • 8 YetToInvest April 15, 2012, 4:54 pm

    @Robert

    Many thanks for taking the time to explain that; much appreciated. Maths has never been one of my strong points!

  • 9 saveonarola April 21, 2012, 12:58 pm

    Agree with everyone else. For me, these HSBC funds look like active funds that think they’re passive. The beauty of Vanguard LifeStrategy is that you not only get automatic rebalancing by asset allocation, but also automatic rebalancing between the regional trackers by market capitalisation (after allowing for the UK home bias). Now that’s what I call passive!

  • 10 Mike November 6, 2016, 4:11 pm

    What other ‘Lifestrategy’ type fund would you suggest I invest my money into now that I am closing in fast on my limit of £50000 in Vanguard funds. I had thought of the HSBC funds in this article but it appears you are not a fan?

  • 11 The Accumulator November 6, 2016, 6:43 pm

    Hi Mike,

    Last time I looked at this, there were a bunch of fund-of-funds, although I don’t like any of them bar Lifestrategy: http://monevator.com/passive-fund-of-funds-the-rivals/

    You can achieve much the same effect by investing in two funds an all-world equities fund and a gilt fund.

    A non-Vanguard of an all-world equites fund is HSBC’s FTSE All-World Index Fund C.

    I don’t let the FSCS compensation limit my investing choices but I appreciate that’s a very personal choice.

  • 12 CisforV April 4, 2017, 8:47 pm

    A potential alternative would be the similarly named HSBC Global Strategy Dynamic Portfolio. It’s cheaper than the World Dynamic fund and more comparable to price and past performance of LifeStrategy 80%. It has less UK equity than LS80 too.

  • 13 GetRichSlow July 11, 2017, 2:12 pm

    So this article was originally written in 2012 and in 2017 I cannot find “HSBC World Index Portfolio” funds on sale. ISIN’s are missing from the original article but searching the internet I found this: http://www.assetmanagement.hsbc.com/uk/attachments/advisers/fund-focus/world_index_portfolios_brochure.pdf

    Which lists the World Index Portfolio ISIN’s as:
    Cautious: Acc: GB00B84DV184 Inc: GB00B84L8664
    Balanced: Acc: GB00B76WP695 Inc: GB00B7PHDP01
    Dynamic: Acc: GB00B849DT80 Inc: GB00B7NM4986

    Looking up these ISIN’s today shows that the funds names have changed to
    “HSBC Global Strategy (Cautious/Balanced/Dynamic) Portfolio” and have OCF’s ranging from 0.16% to 0.21% – if I have done my homework correctly!

    Confusingly there is a similarly named “HSBC World Selection Portfolio” which appears to have 5 numbered funds apparently targeting different risk appetites. But these appear to be unrelated to the World Index Portfolio referred to in the original article.

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