A range of Multi-Asset Passive Portfolios · Although a group of active managers may outperform a given ... Our sophisticated multi-asset passive solution ... And our regular portfolio

HSBC World Index PortfoliosA range of Multi-Asset Passive Portfolios

For professional clients only

World Index. One World. One Investment

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RDR – when you must deliver a consistent `investment process and a robust paper-trail

The changing investment world and potentially `increased opportunities: lower economic growth

in developed economies; and higher-growth but

possibly higher-risk in emerging markets

New FSA regulations – ensuring clients’ portfolios `have an optimal risk/return level

Greater demands for cost transparency from clients `and regulators

The need to control your overheads and make your `business efficient

Why passive investing is an RDR-ready solution

There has long been a debate about the potential for active managers to beat

their benchmarks and justify their fees. And an examination of individual

manager performance over the longer-term shows that the potential of each

manager to maintain a position of outperformance is limited.

Although a group of active managers may outperform a given index, the chart

below shows that individual manager outperformance falls dramatically each

subsequent year across three different indices. Therefore, on the example

below the probability of a manager outperforming three years in a row is less

than 35%.

So when you choose to pay the premium for an active manager it is not only

important to identify the best managers, but also to review and replace them at

the right point in time. A low-cost passive fund may be an intelligent option.

1. Passive investing `offers a cost-efficient

way to access global

opportunities.

2. Passive funds are `neatly aligned with the

requirements of RDR,

where value and cost

matter to clients.

3. Active fund research `is going to become a

more-significant burden

on advisers’ time and

resources.

These three factors increase the relative attractiveness of passive

investment.

Persistence of Skill – active managers outperforming their respective benchmarks in consecutive years.*

S&P 500

46.08% 35.47% 31.31%

3 Yrs

FTSE All Share

47.11% 34.66% 30.53%

MSCI EMERGING MARKETS

43.39% 28.08% 22.78%

1 Yr 2 Yrs 3 Yrs1 Yr 2 Yrs 3 Yrs1 Yr 2 Yrs

We understand your business is changing

The advisory market is going through a period of significant change. Increased client expectations

and regulations are having a significant impact on how you run your investment business now, and

how you may choose to run it in the future. With the ever-growing to do list just to stay compliant, as

well as the need to reduce risk and costs in your business, how prepared are you for:

The bottom line is investors and regulators are increasingly demanding value for money.

Source: Morningstar Direct, average % of managers outperforming relative to their primary prospectus benchmark, data analysed covers the period 1 January 2000 - 31 December 2010. Returns for S&P 500 & MSCI Emerging Markets caluculated in USD, returns for FTSE All Share calculated in GBP.

Past performance is not a guarantee of future performance

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Our sophisticated multi-asset passive solution

Our World Index Portfolios are single-fund solutions

– global, multi-asset funds that primarily hold passive

investment products, namely index tracking funds,

ETFs and direct fixed interest holdings where these

can be bought cheaper.

All of the portfolios are invested across developed

and emerging markets. Additionally, we don’t just

invest in traditional asset classes; we can also invest

in property, private equity, commodities and other

non-traditional assets.

With HSBC’s World Index Portfolios, your clients

will benefit from the expertise of our well-resourced

and highly qualified investment teams managing the

portfolios and their asset allocation.

And our regular portfolio rebalancing ensures that

they remain in line with their agreed risk levels – all at

an extremely low annual charge of 0.5%.

HSBC World Index Portfolios Cost SEDOL

Cautious Lower-risk solution with around 70% fixed income, 20% in equities, 5% in alternatives and 5% in cash. AMC 0.50%

Acc: B64T3D8

Inc: B3Y8RM1

Balanced Medium-risk solution with around 55% in equities, 35% in fixed income and the remainder in alternatives and cash. AMC 0.50%

Acc: B537R78

Inc: B408KPF7

Dynamic Higher-risk solution with around 73% in equities, 19% in fixed income and the rest in alternatives and cash. AMC 0.50%

Acc: B3SSR72

Inc: B42FKK0

HSBC World Index Portfolios at a glance

Source: HSBC Global Asset Management, October 2011.

World Index Cautious World Index Balanced World Index Dynamic

Fixed Income Equities Alternatives Liquidity

UK Gilt US Eq. hedged in GBP Property Cash

UK Inflation Link Bond Europe Eq. hedged in GBP Commodity

US Bond hedged in GBP UK Equity Private Equity

Global Corporate hedged in GBP Japan Eq. hedged in GBP

Global High Yield Asia Pacific ex Japan Equity

EM Debt EM Equity

Cautious Balanced Dynamic

US Eq. hedged in GBP

4.9% 12.4% 14.9%

Europe Eq. hedged in GBP

4.3% 11.0% 15.7%

UK Equity 5.3% 12.3% 15.9%

Japan Eq. hedged in GBP

2.8% 6.1% 4.9%

Asia Pacific ex Japan Equity

0.7% 3.3% 8.7%

EM Equity 2.1% 8.4% 12.9%

UK Gilt 27.0% 15.2% 12.6%

UK Inflation Link Bond

6.3% 1.1% –

US Bond hedged in GBP

18.6% 7.0% 1.6%

Global Corporate hedged in GBP

12.4% 4.6% 1.1%

Global High Yield 3.0% 3.2% 1.7%

EM Debt 2.5% 3.4% 2.0%

Property 1.5% 3.7% 3.1%

Commodity 2.9% 4.5% 3.3%

Private Equity 0.4% 1.1% 1.2%

Cash 5.4% 2.7% 0.3%

The percentage figures shown are for illustrative purposes only and will change regularly

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Well-diversified portfolios for three distinct risk profiles

At HSBC Global Asset Management, we want to

make investment decisions simpler for clients.

So our World Index Portfolios give investors the

ability to choose a single fund that will give them

comprehensive access to the world’s financial

markets. All they need to do is make one decision –

on their risk attitude – and leave the rest to us.

We have created three distinct portfolios which

we believe will meet the risk/return needs of most

investors. We undertook extensive consumer

research to establish how many core investor

segments there are as well as each segment’s

attitude to investment risk. The valuable insights we

uncovered have been used to create these highly

sophisticated multi-asset solutions, which we have

fine-tuned to be closely aligned to consumers’ risk

preferences.

We implement our diversified investment strategy

primarily by using index tracking funds. Where

there isn’t a suitable index fund, we use ETFs. In

the case of government bonds, we are using direct

investments, as this is the most efficient way of

implementing our desired exposure at present. To

gain the best value for investors, we use HSBC index

tracking funds where available, and a selection of

other products from other hand-picked investment

managers. You can see full details of the current

portfolio holdings in the funds’ individual fact sheets.

Five reasons to choose HSBC World Index Portfolios

1. Optimum diversification

Our multi-asset investment team has built the portfolios with what they believe is the right mix of asset

classes to deliver optimum diversification, considering each portfolio’s individual risk range.

2. Robust asset allocation

Asset allocation modelling is a core competency of the multi-asset team. The team

primarily uses HSBC’s tried and tested quantitative methodology. We also incorporate

a qualitative overview into the process.

3. Risk tolerance based on end-customer research

HSBC has undertaken extensive research to fully evaluate the risk tolerance

of each of the three core customer types: cautious, balanced and dynamic

investors. We have used this research in the construction of the portfolios.

4. Regular rebalancing

The portfolios are rebalanced to their original target asset class weightings

every three months. This helps ensure that your client’s risk tolerance is not

compromised as asset classes perform differently over time.

5. Strong governance

HSBC employs extremely strong governance across all investment vehicles.

When we include an HSBC fund or ETF in the portfolios we can be sure

that our high standards of governance are being met. In fact, all of our equity

index funds are AAA rated by S&P – a first among tracker funds. And when

we use investments from other providers we employ the same high standards

of due diligence.

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How we manage the funds – our process

We have a rigorous process to ensure that only the

most appropriate asset classes make it into the

HSBC World Index Portfolios. This is a sophisticated

process that uses advanced quantitative screening

processes and analysis to ensure the optimum mix of

investments for the three portfolios.

Firstly we undertake a thorough assessment of the `available asset classes.

Next we use our in-house quant-based optimisation `process to assess how the asset classes work

together to deliver the best blend.

We then identify the optimal long-term portfolio `structure for the given risk tolerance.

To ensure robustness of the structure we `stress-test the portfolios in approximately 3000

different scenarios.

Finally, we select the best investments for each `asset class regardless of the currency and have

introduced a process of hedging non-sterling assets

back into sterling in certain cases. We do this to

eliminate unwanted currency risk, only entering

into our positions “on purpose” and not be

surprised by increased portfolio risk due to

currency fluctuations.

Source: HSBC Global Asset Management, November 2011

Fulfilment

Choose underlyinginvestments,aiming for the

most cost-efficientsolution for eachasset class held

Asset Allocationoptimal long-term (5-10 years)

portfolio structure (blend ofasset classes, regions,

currencies) for desired portfoliorisk level

Correlationsbetween different

asset classes, usinghistorical data

Forward-lookingreturns for different

asset classes

Annually:Review of

portfolio assetallocation, as

correlations andreturn

expectations maychange over time

Quarterly:Rebalancing of

portfolio to assetallocation target

weights to ensureportfolio remainsin line with risk

budget

Rebalancing /Review

Single asset classrisk, measured byhistoric volatility

Investmentuniverse

Assessment ofavailable asset

classes

Stress-testing of portfolio structure in about 3,000 different scenarios to ensure robustness, using a Monte Carlo simulation methodology:

Monte Carlo Simulation

Monte Carlo Simulation is a class of computational algorithms that rely on repeated random sampling to

compute their results. The process allows us to value and analyse complex portfolios by simulating the

various sources of uncertainty affecting their value, and then determining their average value over the range

of resultant outcomes. Therefore the Monte Carlo simulations enable the construction of stochastic financial

models, as opposed to traditional methods that do not take into account that market conditions may change

and returns may vary. By running the simulations, we can therefore stress-test our expected returns over

different time periods, considering historic correlations and volatility. The process factors in the fact that

actual asset class returns may be different from our return expectations and enables us to better understand

each portfolio’s behaviour in different market circumstances.

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How we manage asset allocation

Asset allocation is important, get your asset allocation

wrong and any returns from your fund selection can

be completely wiped out.

Our approach to asset allocation emphasises targeting

a realistic long-term real return after inflation, and

which rewards investors for the risk being taking. Our

asset allocation strategy relies on two principles:

1. From year to year, asset classes perform

differently.

2. Diverse asset classes offer returns that are not

perfectly correlated.

The diagram on this page provides a visual insight into

how asset classes deliver different returns from year

to year. This underlines our view that asset allocation

is critical to a successful investment strategy.

Source: HSBC Global Asset Management, January 24th 2011. DataStream, Bloomberg, Citigroup, Barclays Capital. Data as of 31st December 2010. All returns in USD. Sources used to represent each asset class shown are:

Absolute return = C.S/Tremont Hedge Fund Multi-strategy NAV, Cash = US Euro$3 month TR, Commodity = DJ UBS Commodity Price Index, Emerging markets equities = MSCI EM TR, Global bond = BarCap Aggregated

Index USD Hedge TR, Global equities = MSCI World TR, Hedge fund = C.S/Tremont Hedge Fund NAV, Private equity =LPX50TR Index, Property = FTSE/NAREIT All Reits TR. Past performance does not guarantee

future results.

Which asset will perform best each year?

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

25.9 15.5 33.3 56.3 30.4 34.5 34.4 39.8 5.6 79 31.8

21.2 7.2 8.5 49.8 26.0 30.2 32.6 25.3 3.1 51.6 27.6

11.2 5.5 6.3 38.5 24.2 21.7 26.5 12.6 -19.1 41.2 26.4

10.3 4.4 5.2 33.8 15.2 10 20.7 10.1 -23.6 30.8 19.2

6.7 3.8 3.0 19 12.4 8.3 14.8 9.6 -28.9 27.4 12.3

4.8 -2.4 1.8 15.4 9.6 7.6 14.5 5.4 -37.3 24.6 10.9

-12.9 -16.5 -6.0 15 7.5 7.5 13.9 5.3 -40.3 18.6 9.3

-30.6 -18.2 -17.6 3.1 4.9 4.3 5.3 -5.0 -53.2 5.1 4.6

-34.7 -24.7 -19.5 1.2 1.6 3.6 3.6 -17.8 -66.1 0.8 0.5

Property

Commodity

Absolute Return

Global Bonds

Cash

Hedge fund

Global Equities

Emerging Market Equities

Private Equity

BEST

WORST

Where appropriate we can efficiently gain access to non-sterling assets by hedging back into sterling.

The numbers in the boxes indicate % changes in value.

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Efficient asset allocation delivers a better risk and reward

Asset allocation has a significant impact on the potential for a diversified

portfolio to achieve its objectives within a managed spectrum of risk. There

is a fine balancing act to perform in terms of the number of asset classes

to include in a fund of this nature. The finessing of a multi-asset allocation

model is as much an art as it is a science.

The number of asset classes is one important factor but so too is the

correlation of asset classes with each other. Using only asset classes that

are closely correlated can even increase the risk of the portfolio without

incrementally increasing the potential return. Therefore, a strategy should

not be judged purely on the number of asset classes it holds, but rather on

how those asset classes interact with each other.

We have, therefore, constructed the portfolios using what we believe is the

correct number of asset classes to deliver the optimum potential upside for

the minimum amount of risk. That’s why we think our World Index Portfolios

are an efficient investment choice.

We blend asset classes to achieve two goals: to reduce unnecessary, unrewarded and unacceptable risks; and benefit from long-term returns for a given level of risk.

To keep the portfolios in line with their agreed risk levels, we review our asset allocation target weights at least annually. We do this because expected returns and correlations between asset classes, for example, may change over time.

Clever asset

allocation can

increase expected

returns without

increasing risk

by lifting the efficient

frontier

Source: HSBC Global Asset Management. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. For illustration purpose only.

Risk

Reward

World Index Cautious

World Index Balanced

World Index Dynamic

Cautious Balanced Dynamic

x

x

x

HSBC World IndexPortfolios

Equity/BondsPortfolios

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World Index. One World. One Investment

Contact our UK sales team for more information:

Email: [email protected] or Free phone: 0800 181 890

This document is intended for Professional Clients only and should not be distributed to or relied upon by

Retail Clients. The views expressed above were held at the time of preparation and are subject to change

without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any

way. HSBC Global Asset Management (UK) Limited accepts no liability for any failure to meet such forecast,

projection or target. The World Index Cautious Portfolio, the World Index Balanced Portfolio and the World Index

Dynamic Portfolio are sub-funds of HSBC OpenFunds, an Open Ended Investment Company that is authorised

in the UK by the Financial Services Authority. The Authorised Corporate Director and Investment Manager is

HSBC Global Asset Management (UK) Limited. All applications are made on the basis of the HSBC OpenFunds

prospectus, simplified prospectus and most recent annual and semi annual report, which can be obtained upon

request free of charge from HSBC Global Asset Management (UK) Limited, 8, Canada Square, Canary Wharf,

London, E14 5HQ, UK, or the local distributors. Investors and potential investors should read and note the risk

warnings in the prospectus and relevant simplified prospectus. The value of investments and any income from

them can go down as well as up and investors may not get back the amount originally invested. Where overseas

investments are held the rate of currency exchange may also cause the value of such investments to fluctuate.

Stockmarket investments should be viewed as a medium to long term investment and should be held for at

least five years. Any performance information shown refers to the past and should not be seen as an indication

of future returns. To help improve our service and in the interests of security we may record and/or monitor

your communication with us. HSBC Global Asset Management (UK) Limited provides information to Institutions,

Professional Advisers and their clients on the investment products and services of the HSBC Group. This

document is approved for issue in the UK by HSBC Global Asset Management (UK) Limited who are authorised

and regulated by the Financial Services Authority.

Copyright © HSBC Global Asset Management (UK) Limited 2011. All rights reserved. 21415/AS/1111 FP11 – 1943