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HSBC enters freestyle race

HSBC Asset Management has joined the quest for absolute returns with the introduction of the HSBC freestyle fund.

This is an Oeic which invests in a concentrated portfolio of between 25 and 30 UK equities that are selected without reference to a benchmark index. This means the fund is likely to have a lower correlation to the FTSE All Share index than funds which produce relative returns.

The fund will be invested only in stocks which are regarded as undervalued by the investment team. There will be a target value for each stock and when this price is reached that stock will be sold.

When selecting stocks, fund manager Bob Morris and the rest of the team will take a bottom-up approach. They will also look at how the broader economic picture affects different companies and sectors. The best stocks will be companies where the risk of the share price falling is small relative to the anticipated gain.

According to HSBC, the use of a benchmark index can be a problem for fund managers because they may be forced to hold a sector or stock they do not like to prevent the risk of underperforming the benchmark.

This is not the case with HSBCs freestyle approach, but one criticism often made about concentrated portfolios is that fewer holdings may reduce diversity.

However, HSBC argues that the freestyle approach offers more diversity than larger portfolios aiming for relative returns because benchmark indices are increasingly concentrated. For example, the top 10 stocks on the FTSE All Share index make up 42 per cent of the index and the index is dominated by sectors such as banks and oil.

While this may be the case, the freestyle approach places stockpicking under the spotlight, so the fund will only be as good as the managers ability to pick the winners.


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