Climate change fund hits Hong Kong public

HSBC has launched its first climate change fund in Hong Kong, offering retail investors with US$1,000+ a chance to benefit from the “staggering amounts of money” that will be spent on climate change related activities in the coming years.

SINOPIA chief executive Patrice Conxicoeur with HSBC Investment's Bonnie Lam at the Hong Kong fund launch

SINOPIA chief executive Patrice
Conxicoeur with HSBC Investment’s
Bonnie Lam at the Hong Kong
fund launch

HSBC has launched its first climate change fund in Hong Kong, offering retail investors with US$1,000+ a chance to benefit from the “staggering amounts of money” that will be spent on climate change related activities in the coming years.

The HSBC Global Investment Funds – Climate Change Fund aims to outperform the HSBC Global Climate Change Benchmark Index by 3% through a purely quantitative score-based strategy managed by HSBC’s SINOPIA Asset Management.

Hong Kong based SINOPIA chief executive Patrice Conxicoeur said climate change had been “the biggest market failure ever” because of a lack of economic incentives. “But thanks to regulation, thanks to public awareness, there are quite tremendous economic opportunities that companies are likely to seize,” he said.

Conxicoeur said the market had had already taken notice of the opportunities, as seen in the “flat-out” performance of HSBC’s independent climate change index compared with global equity index benchmarks.

“Very clearly, some companies are going to benefit from this,” he said. “Some companies are not – this is not all milk and honey. There will be winners and there will be losers, and there will be a need to discriminate” said Conxicoeur.

SINOPIA uses a highly methodological scoring-based approach to pick stocks from the HSBC Global Climate Change Index universe – separated from SINOPIA by a “very wide and deep Chinese wall” according to Conxicoeur.

SINOPIA’s skills lie in quantitative analysis, an approach which led HSBC to choose the asset manager as the launch manager for its first climate change fund, says Conxicoeur.

Conxicoeur says HSBC preferred the mathematical-model based investment approach to using industry experts. “The key point here is about looking at the figures rather than listening to the stories. Our approach is systematic, unemotional – emotion is something which would be greatly tempting with this theme, but emotion is definitely not your ally if you are an investor.”

“We could appoint experts who would guide us through the maze of regulations, technology, and help us make the right stock picks,” continued Conxicoeur.

“But there is a big difference between having insights in technology, having insights in politics and on the other hand picking stocks. Those are all respectable activities but they are not exactly the same,” he said. “And the objective here is to produce something which actually performs well.”

SINOPIA starts with the Index universe, which is developed in terms of analyst coverage, “green” credentials, liquidity and market capitalisation.

Index sector weightings

Index sector weightings

The asset manager then applies its multi-criteria scoring tool to this universe. “We focus on three things,” he says. “Momentum, valuation and growth. And while we know some of these [stock picking] factors go in and out of fashion, we also know that exercises that try to pick when the fashion changes, usually those exercises fail. Timing the market is the most difficult and risky think to do, so rather than ignoring any of these factors we monitor them on a daily basis.”

While scoring is done on a daily basis, the portfolio is reallocated monthly to keep turnover and trading cost low. “In reality, this being a very dynamic environment, trading will happen a bit more often than that,” said Conxicoeur. An example given is Kelda, the UK water company, which was originally included in Conxicoeur’s presentation to the press. “This was potentially interesting to invest – but it was taken private a few weeks ago, one of the many examples of how dynamic things are” he said.

Discretion

The only discretion allowed managers is when scoring results are too close to call. “SINOPIA has been managing stock scoring models for a long time,” says Conxicoeur. Recognising the strengths and weaknesses of a quant model is the key to success, he says. “One of the potential weaknesses would be to fool ourselves into thinking the tools are 100% accurate,” he says. “So we realise small differences in scores are not necessarily particularly significant.”

In addition, while the fund is not geographically weighted outside the benchmark’s own weighting, Conxicoeur says the manager would have some discretion if the scores turned out a portfolio where 90% of the stocks were in the US, for example.

Conxicoeur says around 90% of the investment decisions are quantitative, while 10% have a more active, discretionary flavour.

You say Toyota…

This disciplined quant approach differs from the other recent entrant to the “green fund” market, ABN Amro Asset Management’s Clean Tech fund launched late last year. The ABN Amro Fund has similar strict rules for inclusion, yet managers have more discretion to include companies who do not meet the criteria yet are seen as “market leaders” says Christian Goldsmith, Hong Kong based international product specialist for ABN Amro Asset Management.

Hence some interesting polarised “green” views in the two funds: ABN Amro will consider investment in Toyota, which has around 1% of its sales (by car) from the hybrid Prius; HSBC’s new fund will not invest in car companies, says Conxicoeur. Meanwhile ABN Amro says its fund will not invest in Philips, as the energy efficient light bulb revenue of the electronics giant is not sufficient to warrant inclusion. HSBC, on the other hand, includes Phillips as a candidate for investment. “Philips is a company which has turned what was for them a major threat – turning out something that could become irrelevant – into a major business opportunity,” says Conxicoeur.

These decisions are not investment decisions – ABN Amro’s fund may or may not be invested in Toyota at any one time (depending on market conditions, company performance, fund weighting or a thousand other investment criteria) but the carmaker is nevertheless in the asset manager’s investment universe for the green fund. Likewise HSBC’s fund may not necessarily have money in Philips, but could do so within the rules of its climate change fund.

It is interesting to note how Philips and Toyota are considered “green” by one investor and not the other, a dichotomy which perhaps reveals how ill-defined the “clean tech” or climate change sector really is, especially considering the world-class pedigree of both investment managers.

Performance

Index performance

Index performance

While stock markets have been volatile and generally tumbling since August last year, Conxicoeur says the climate change sector is not something at risk from economic downturn. The index has achieved a total return of 164% since January 2004, based on back testing, compared with the 76% delivered by the MSCI World Index over the same period.

“A lot of the drivers we are looking at are not exactly linked to the level of economic activity – this is not something which is growth cycle sensitive,” said Conxicoeur. For example, in the low carbon energy sector, the drivers are energy efficiency, renewable energy sources and government policies. “Those are things relatively independent from market sources. For example, electricity sold in the UK by law now must have an increased clean content year after year. That is irrespective of the market environment.”

When asked about the political risk inherent in such investments, Conxicoeur said the pressure is “all one way” right now. In addition, he says, his fund is invested across 34 different countries, offering a portfolio well diversified against such risks.

A bonus for Hong Kong investors is the low correlation of the fund with Chinese stocks. “The region has been crazy about all things Chinese for three years,” he said, “buying lots of Chinese stocks and China related plats, to the point where we believe there is more than ever a need for diversification.”

The low correlation is “the icing on the cake” for Hong Kong investors, he said.

From the top

Conxicoeur says HSBC’s climate change activities have come “right from the top.” He recalled a private speech made by London based HSBC group chairman Stephen Green last November, in which Green mentioned the fund by name. “As far as I know this was the first time the chairman of HSBC had mentioned a fund by name,” said Conxicoeur, adding that this was remarkable considering the fund was only two or three days old at the time.

“It’s not something we started here [in Hong Kong],” he said. “A lot of initiatives – turning the bank into a carbon neutral financial institution, for example – that has to come from the very top, no doubt about it.”

More climate change and environment based products may well appear from HSBC, said Conxicoeur, although for now the bank was concentrating on this new fund. “You can always look at this from different angles,” he said. For example, while the new fund uses the climate change index as a benchmark, with a mandate to outperform the benchmark, other products may take a more passive role such as pure index exposure. Other products, such as a warrant on the index, may be forthcoming.

About James Ockenden (223 Articles)
A writer covering international energy and power markets since 1996
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