NFO Review - HSBC Brazil Fund
Apr 21, 2011

Author: PersonalFN Content & Research Team

HSBC Brazil Fund

HSBC Brazil Fund (HBF) is a Fund of Funds Scheme designed to provide investors an opportunity to benefit from the investment opportunities in Brazil.

Summary

Type	Open-ended Fund of Funds scheme	Benchmark Index	MSCI Brazil 10/40 Index
Min. Investment	10,000	Face Value	10 per unit
Entry Load	Nil	Exit Load *	Upto 1 year: 1.00% After 1 year: Nil
Issue Opens	April 15, 2011	Issue Closes	April 29, 2011

Investment Objective*

The primary investment objective of the Scheme is “to provide long term capital appreciation by investing predominantly in units / shares of HSBC Global Investments Funds (HGIF) Brazil Equity Fund. The Scheme may, at the discretion of the Investment Manager, also invest in the units of other similar overseas mutual fund schemes, which may constitute a significant part of its corpus. The Scheme may also invest a certain proportion of its corpus in money market instruments and / or units of liquid mutual fund schemes, in order to meet liquidity requirements from time to time”.

*Source: Scheme Information Document

Is this fund for you?

HSBC Brazil Fund (HBF) is an open ended fund of funds scheme from HSBC Mutual Fund. It is a feeder fund which will predominantly invest in units / shares of HSBC Global Investments Funds (HGIF) Brazil Equity Fund (HGIF-BEF), and will provide an individual to benefit from the investment opportunities available in Brazil.

Since HBFs investments will be predominantly in the HGIF-BEF, its performance will be directly linked to the performance of HGIF-BEF, which invests in the equity and equity related securities of companies located, listed or regulated in Brazil.

Brazil being one of the growth oriented emerging markets is rich in natural resources and highly dependent on domestic consumption and less on exports. It yet has a strong financial system. As such investments of HGIF-BEF are limited to a narrow segment of the economy. Hence the fortunes of HBF will remain sensitive to movements in the few sectors of Brazilian economy.

Hence, we advise the investors’ to carefully assess their risk appetite and their preference of geographical diversification before committing to a feeder fund like HBF.

Portfolio & Investment Strategy: HBF

HSBC Brazil Fund (HBF) is an offering from HSBC Mutual Fund which will predominantly invest in units of HGIF-BEF, which in turn will invest in stocks listed in the Brazilian equity markets. The Scheme may also invest a certain proportion of its corpus in money market instruments and / or units of liquid mutual fund schemes managed by the AMC or in the schemes of any other mutual fund.

Particulars	Approximate Allocation (% of corpus)	Risk Profile
Units / shares of HGIF Brazil Equity Fund	95% to 100%	Medium to High
Money Market Instruments	0% to 5%	Low to Medium

(Source: Scheme Information Document)

HSBC Global Investment Funds (HGIF) is an investment company incorporated in the Grand Duchy of Luxembourg and qualifies as an Undertaking for Collective Investment in Transferable Securities. HGIF-BEF is the sub-fund of HGIF and has been currently identified by HBF for overseas investments of funds collected by HBF. Further, HBF may in future identify such additional funds as may be required from time to time.

Portfolio & Investment Strategy: HGIF-BEF

HGIF Brazil Equity Fund seeks long term capital growth by investing primarily in a well diversified portfolio of investments in equity and equity equivalent securities of companies which have their registered office in, and with an official listing on a major stock exchange or other Regulated Market of Brazil. Interestingly the fund has no bias towards particular market cap or style in selecting investment opportunities. While picking stocks, the fund manager follows a combination of both top - down and bottom - up approach.

HSBC GIF Brazil Equity Fund – Fund Data

Performance as on 28th Feb, 2011	1 month	3 months	6 months	1 year	3 year	5 years
HSBC GIF Brazil Equity Fund	1.3%	0.8%	11.8%	17.1%	-8.4%	62.4%
MSCI Brazil 10/40 Index	2.6%	3.3%	11.0%	16.1%	11.3	109.6%
All returns are absolute Past performance may or may not be sustained in future

(Source: HSBC Global Asset Management, Global (Fund Data))

As per the available data as on February 28, 2011, the underlying HSBC GIF Brazil Equity Fund has underperformed its benchmark MSCI Brazil 10/40 Index over the 3 years and 5 years time frames. However it is has managed to outperform the benchmark index over the 1 year period.

HGIF-BEF Performance vis-à-vis BSE Sensex and Bovespa:

(Source: www.globalfunds.hsbc.com, ACE MF, Personal FN Research)

The graph above shows, 10,000 invested in HGIF-BEF 5 years ago (i.e. on March 30, 2006), is worth 17,481 on March 31, 2011, whereas a similar investment in BSE Sensex (Indian equity market benchmark index) and Bovespa (Brazilian equity market benchmark index) has yielded 17,197 and 18,156 respectively. Thus HGIF-BEF has underperformed Bovespa (Brazilian Equity Market Index), however it has managed to marginally outperform the BSE Sensex (Indian Equity Market Index).

HGIF-BEF – Holdings & Sector Allocation

Top 10 Holdings (28/02/2011)	% of Assets	Sector Allocation (28/02/2011)	% of Assets
ITAU UNIBANCO HLDG/PFD SADR	6.0%	Industrials	19.9%
CCR	4.2%	Financials	19.7%
BR MALLS PARTICIPAES SA	4.1%	Materials	19.1%
BRADESPAR SA BRASIL/PREF.	3.8%	Consumer Discretionary	14.5%
VALE /SADR	3.7%	Energy	11.2%
Petroleo Brasileiro SA	3.4%	Consumer Staples	6.8%
BANCO DO BRASIL SA	3.4%	Telecommunications	3.3%
DURATEX	3.2%	Healthcare	2.7%
VALE /NAM.	3.1%
BRF FOODS	3.1%
Total	37.9%	Total	97.2%

(Source: Scheme Information Document and HSBC Global Asset Management, Global (Fund Data))

Risk Factors associated with HGIF-BEF*

Currency Risk: As the underlying scheme will invest in securities which are denominated in foreign currencies (e.g. US Dollars), fluctuations in the exchange rates of these foreign currencies may have an impact on the income and value of the scheme.
Sector Concentration Risk: The portfolio may have a high concentration in natural resources sector. As these investments are limited to narrow segment of the economy, the performance of the scheme could be sensitive to movements in these sectors.
Country Risk: As the portfolio will invest primarily in companies which have their registered office in, and with an official listing on a major stock exchange or other regulated Market of Brazil, investments in the scheme may be adversely affected by political, economic and social risks with respect to Brazil.
Emerging Market Risk: Brazil, being an emerging market, investments in Brazil equities and securities may involve risk, due to the economic and political development processes. Economies in Emerging Markets generally are heavily dependent upon international trade and thus investment in emerging markets involve risks such as the restriction on foreign investment, trade barriers, counter party risk, exchange controls, high investment costs and the liquidity of the companies’ assets depending on the market condition in certain emerging markets.

*Source: Scheme Information Document

Outlook on Brazil:

Brazil is the world’s eighth wealthiest economy (2010 GDP- US$ 2.1 trillion) and has immense natural resources and a strong industrial development potential. It has also weathered the global financial downturn with relatively minor impacts. The country was one of the last to fall during the recession in 2008 and among the first to resume growth in 2009. Brazil's GDP grew 7.5% in 2010 and is expected to grow approximately 4% in 2011, according to the World Bank report.

However, the potential growth of the country has been limited by various barriers and regulations, as well as inadequate infrastructure and a poor business climate. Moreover, the education system in Brazil does not seem to be in a position to take advantage of the huge labour force.

For a middle income country like Brazil, inequality (gap between the rich and the poor) remains at relatively high levels. There is a large gap in access to infant and secondary education. After having reached universal coverage in primary education, Brazil is now struggling to improve the quality and outcome of the system, especially at the basic and secondary levels which in turn disarms the country to take advantage of the demographic dividend as mentioned above.

Fund Manager Profile

The fund’s investments in foreign securities would be managed by the following fund managers:

Mr. Gaurav Mehrotra – He is the Assistant Vice President, Investment Management at HSBC Asset Management (India) Private Limited, and holds a degree in Engineering as well as a Post Graduate Diploma in Business Management. He has a total experience of over 5 years in research. Prior to his association with HSBC in September 2007, Mr. Mehrotra was associated with the JP Morgan Services India Private Limited as Equity Research Analyst and Tata Consultancy Services Limited as Business Analyst.
Mr. Niren Parekh – He is the Associate Vice President, Investment Management at HSBC Asset Management (India) Private Limited, and has done his CA as well as a Post Graduate Diploma in Business Management. He has a total experience of over 4 years in research. Prior to his association with HSBC in September 2007, Mr. Parekh was associated with the Motilal Oswal Securities Limited as Analyst and SBI Capital Markets as Management Trainee.

As regards the domestic investments are concerned, they would be managed by Mr. Sanjay Shah who is the Vice President and Fund Manager (Fixed Income) at HSBC Asset Management (India) Private Limited. Mr. Shah has done his CA, B.Com. and also holds a PGDM degree. He has over 10 years of experience in research and risk.

Prior to joining HSBCAMC, he has worked with FIL Fund Management Pvt. Ltd., Lehman Brothers Structured Financial Services Pvt. Ltd, Rabo India Finance Pvt. Ltd., ICICI Bank Ltd. and SBI Funds Management Pvt. Ltd.

Fund Outlook

Primarily HBF’s equity portfolio would be constituted of units of HGIF Brazil Equity Fund, which will invest in stocks of companies in Brazil. As per its mandate, HGIF Brazil Equity’s portfolio will be diversified across sectors and market capitalisations.

Though the strategy of reaping the benefits in the growth story of Brazil sounds to be a prudent one due to abundant natural resources available in the country, it (Brazil) may not be able to completely take advantage of the demographic dividend available due to lack of prudent education system at basic and secondary levels.

Since HBF is a feeder fund, investors would have to bear additional cost (in terms of dual management fees and expense ratio), also there may be additional risks such as exchange rate risk and country risk (political instability) associated with Brazil which needs to be accounted for before making an investment decision.

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