• 07/05/2016

HSBC’s credit expert Cecilia Chan explains why alpha dominates and when it goes beyond

A United Front

By Nandini Rao

Clear beliefs, solid teamwork and a well-executed investment process, are the cornerstones of HSBC Global Asset Management’s philosophy. Fixed Income CIO Cecilia Chan explains how the fixed income team’s adherence to these beliefs have resulted in it being recognized as Best-in-Class in the Manager of the Year – Asian Fixed Income Category.

Cecilia Chan is proud of the fixed income team that HSBC has nurtured over the years: “Our structure promotes focused specialization,” Including herself, the team consists of 33 experienced investment professionals (including 21 portfolio managers and 11 credit analysts), with an average investment experience of 12 years. Credit analysts are mainly involved in the fundamental research of individual bond issuers, while portfolio managers are responsible for overall fund construction. Analysts and managers collaborate closely, and everyone contributes to investment decisions. The team is further supported by the global credit research platform, which has over 40 analysts.

“We have investment offices in Hong Kong, Taiwan, India and China, and this structure offers several advantages. First of all, there is consistency in both philosophy and process across the region, and secondly, we have the ability to share our best investment ideas for the benefit of all our clients,” noted Chan. “There is also a regional framework for team members to stress test their ideas with colleagues who operate in different environments,” she continued.

Indeed, Chan actively encourages the sharing of portfolio management and research. This structure ensures consistency in the investment decisions taken for different portfolios and importantly, allows the team to focus on generating superior investment returns within a dedicated and transparent risk framework. “We are one of the best-resourced Asian Fixed Income teams in the world,” notes Chan.

Drivers of Alpha

“What differentiates us from other fixed income houses is our core investment belief that good governance and a well-executed process are the keys to delivering long-term value for our clients,” describes Chan.

The investment process is active, fundamental and value-driven, and uses quantitative inputs on a selective basis. The approach combines a top-down qualitative analysis of macroeconomic dynamics along a structured bottom-up research into individual bond issuers and fixed income securities.

The team utilizes local insights to exploit alpha sources to deliver strong risk-adjusted returns, regardless of market cycles. Furthermore, it seeks to achieve optimal risk-adjusted returns against specified benchmarks by aiming to use as many uncorrelated alpha sources as possible. Chan added: “We are also rigorous in applying consistent risk budgeting frameworks for all portfolios. This means that significant directional positions, which result in any extreme binary outcome are unlikely to occur.”

The investment process allows the flexibility of being both ‘long’ and ‘short’ key fixed income risks. Also, the team can invest with conviction, by taking very defensive positions if necessary and larger positions (long or short) in high-conviction areas.

Chan emphasizes that there are no shortcuts in managing bond funds, particularly in credit markets, where it is important to understand the fundamental details of the bond issues that they invest in. She also states that it is important to have the experience to identify potential concerns.

The Corporate Governance Element

As a company, HSBC Global Asset Management has a strong focus on corporate governance. The fixed income team pays close attention to Environmental, Social and Governance (ESG) factors when investing in bonds. Analysis of ESG-relevant items forms a part of the team’s credit analysis and they look to avoid companies with material issues. The team refers to information from external ESG-dedicated service providers and discusses any concerns in meetings with investee companies.

Managing the Downside

HSBC has a transparent risk-management framework. “We always try to be proactive when monitoring the bonds we buy; we want to be forward looking with regards to the credit development of our investments. Our team takes credit research very seriously, as it is an integral part of our investment process” says Chan. When faced with a downgrade, the team works hard to protect its investors from any negative fallout. Indeed, it preempts default by paying close attention to an issuer’s fundamental credit outlook and the valuation of their bonds.

“For fixed income, the potential upside is asymmetric when compared with the potential downside in a default scenario. So, if our credit analysis shows that there is a material risk of default, then we are more likely to dispose of the bond,” noted Chan.

Credit Fundamentals

HSBC’s fixed income team also analyze the credit fundamentals of every bond and judge its relative value against the often comparable peers. Sometimes, the price of the bond already reflects any negative newsflow so that no action may be required. At other times, the bond may be trading either too cheaply or expensively – these are opportunities to generate alpha.

Risk management also involves measures to ensure that no single holding breaches the team’s investment guidelines.

“As the first line of defense, our team has a good understanding of our portfolio requirements,” said Chan. “This enables them to construct the optimal portfolio within HSBC’s investment guidelines. As a further insurance, we employ a number of investment management systems that allow very detailed analysis of our portfolio risks,” she added. “These controls also prevent trades that are not in line with investment guidelines. The risk management team also monitors all the portfolios post-trade to make sure they are in good order,” concluded Chan. BM



Nandini Rao 撰文