HSBC FTSE 250 Index: July 2023 fund update

• HSBC has been running tracker funds for over 30 years
• We think this fund is a good option for exposure to UK medium and small sized companies
• The fund’s low charges should continue to help it track the FTSE 250 index closely
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The HSBC FTSE 250 Index Fund offers a low-cost solution for tracking the performance of the FTSE 250 Index, which is made up of medium-sized UK companies.

Medium-sized companies typically offer more growth potential than the larger companies of the FTSE 100, though they can be more volatile. They also tend to carry out more of their business domestically in the UK. That said, the broader FTSE 250 Index includes investment trusts, some of which invest in overseas markets. This provides the fund with some international diversification.

An index tracker fund is one of the simplest ways to invest, and we think this fund could be a great, low-cost starting point for a portfolio aiming to deliver long-term growth. We think this fund could help diversify an investment portfolio focused on larger, or global, companies.

Manager

HSBC has been a provider of index trackers for over 30 years and is home to an experienced management team. Each fund has a primary, secondary and deputy fund manager, who tend to specialise in a particular region, though in practice the team as a whole helps to manage each fund.

Since our last update, Nelson Gu has taken lead responsibility for the fund following Jonathan Dilley’s departure last year. Given the fund's team approach we retain confidence in their ability to provide simple and effective tracker options for investors.

Many HSBC portfolio managers also have wider responsibilities across the business, such as working on projects to understand their clients’ needs in more detail. This helps them drive change and innovation, which we think complements their role.

Process

The fund aims to track its benchmark by investing in all the stocks in the index, and in the same proportion. This is known as full replication. The team aims to track the index as closely as possible by reducing trading costs, which is a key part of their strategy.

There may be instances when it’s not possible or practical for the fund to invest in every company in the index. This is because it's sometimes difficult to buy and sell the smallest companies quickly or at low cost, which could ultimately impact performance.

Instead, the team has the flexibility to use derivatives to help manage the fund efficiently. This involves using 'futures', which provide a quicker and cheaper way to get exposure to the broader index, instead of buying smaller companies at a higher cost. Though derivatives can add risk where used.

The team can also participate in initial public offerings if they know that the company will be added to the index in a few days’ time. This allows them to purchase companies earlier and potentially at a lower price before the rest of the market is involved. It’s another method to help them track the benchmark closely.

The fund also participates in securities lending whereby some of the investments in the portfolio are lent to others in exchange for a fee. This helps to keep costs lower, but also adds risk.

Culture

The passive investment team at HSBC may not be as large as some big index providers, though it's still experienced and committed to improving ways of tracking the index closely. The team is open when it comes to sharing ideas and information. We believe this adds good challenge on how to run the fund effectively.

Employees are also encouraged to participate in HSBC’s share save scheme which should encourage them to be more engaged with the growth of the company. This means portfolio manager’s interests are better aligned with investors.

ESG Integration

HSBC’s portfolios, including their tracker funds, exclude shares or bonds issued by companies involved in the development, production, use, maintenance, sale, import or export, storage or transportation of weapons banned by international convention.

A separate team at HSBC are also responsible for voting, and voting decisions are arrived at with reference to a comprehensive voting guidelines policy. Voting activity is disclosed on the company’s website quarterly, but this is not accompanied by a rationale. They prioritise engagement based on the scale of client holdings, salience of the issues concerned, and overall exposure to the issue in question. That said, we don’t feel the firm’s engagement approach is as well developed as some competitors.

For the FTSE 250 Index fund, the stewardship team recently engaged with Pennon, a water utility company, on sewage storm water overflows. The company have since established a long-term plan to help manage and control these risks, but their engagements remain ongoing to increase the speed of these changes.

Cost

The fund has an ongoing annual fund charge of 0.37%, but a discount of 0.05% is available for HL investors, which reduces the charge to 0.32%. Our platform charge of up to 0.45% per annum also applies.

HSBC has recently altered the way it calculates its ongoing charges figure (OCF) in line with recommendations from the Investment Association (IA).

The IA issued guidance in July 2020 and reconfirmed its position in January 2022, concerning the disclosure of costs and charges for UK funds. More specifically, the IA guidance indicated that the OCF for UK funds should take account of ‘look-through’ costs for underlying investments like investment trusts and real estate investment trusts (REITs) held within the portfolios.

Incorporating the new guidance leads to a material increase in the OCF for the HSBC FTSE 250 Index fund. However, this does not represent an increase to actual management or operational costs investors in the fund experience. These costs have always existed and have been reflected in the performance of the funds. This is only a change to the way costs are disclosed.

Performance

The fund’s tracked the FTSE 250 index well since launch to the end of June 2023, returning 37.74%* versus the index’s 40.61%. As you would expect from an index tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved in running the fund. However, the techniques used by the managers have helped to keep performance as close to the index as possible and reduced the fund’s tracking difference.

Over the 12 months to 30 June 2023, the FTSE 250 index and this fund have risen by 1.87% and 2.05% respectively. The FTSE 250 Index currently has significant exposure to sectors such as Financial, Industrials and Consumer Discretionary. Therefore, these sectors are likely to have the biggest impact on the market’s performance at the moment, though the makeup of any index can change over time.

Given HSBC’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well in the future, though there are no guarantees. Remember, past performance isn’t a guide to future returns. Investments rise and fall in value, so you could get back less than you invest.

Past performance is not a guide to the future. Source: *Lipper IM to 30/06/2023.

Find out more about HSBC FTSE 250 Index including charges

HSBC FTSE 250 Index Key investor information