All about HSBC Unique Opportunities Fund

The Fund aims to provide long-term capital growth from a diversified portfolio of equity and equity related instruments. The focus would be to invest in stocks of companies facing 'out-of-ordinary' conditions.
*Source: Offer Document

HSBC Unique Opportunities Fund (HUOF) is a 3-Yr close-ended diversified equity fund, with an automatic conversion to an open-ended fund at the end of the period. The fund aims to "tap market opportunities earlier than the norm; to be proactive or quick to respond to changes in policies, trends, regulations etc. as well as to think 'out of the box' about various circumstances faced by different companies/sectors".

Some companies that can be candidates for HUOF's portfolio include those witnessing a turnaround, spin-offs, mergers, new product/business launches to cite a few instances. The fund will invest in companies that are trading at a discount to their fair value as a result of some of these factors. It will rely heavily on its research process to identify the unique opportunity earlier on and invest in it so as to benefit from the discount in the fair value of the company's share price.

HSBC Mutual Fund is a process-driven fund house. In its reasonably short tenure, HSBC Equity Fund, a predominantly large cap equity fund (launched in December 2002), has performed well. Other equity funds from HSBC Mutual Fund do not have the track record (we prefer to evaluate equity funds over a minimum period of 3 years) for us to comment on their performances.

Traditionally, the fund house pursues the top down investment style (which involves first identifying the sector for investment and then the companies within that sector). HUOF will mark a departure from this style to the bottom up approach (which involves identifying the company regardless of how the sector is performing). Another aspect on which HUOF will differ (from its siblings) is the stock allocations, which could be much higher than what we are accustomed to seeing in HSBC Mutual Fund's equity funds. So in a way, HUOF's distinct investment style will 'test' the HSBC Mutual Fund's fund management team.

In our view, unless well-identified (in terms of the opportunity and the timing), investing in stocks that present a unique investment opportunity can be fraught with above-average risk or in the very least it may not pay off to the extent envisaged by the fund manager. To that end, we recommend that investors consider investing in a well-managed value fund (which evaluate many, if not all, the factors outlined by HUOF for stock selection) with a well-established track record like DSP ML Equity Fund (48.1% compounded annual growth over 5-Yr).

With regards to HUOF, we recommend that investors evaluate the fund over the 3-Yr tenure and take a revised view based on the fund's performance.

HUOF is likely to prove to be a high risk-high return investment proposition due to two reasons, first is the inherent risk of investing in companies that qualify as unique investment opportunities, second is the aggressive investment style (in terms of concentrated stock allocations) that it will pursue under certain circumstances. However, the fund could find an ally in the 35% debt allocation to stem volatility during turbulence in stock markets