A clearly defined mandate and high-level engagement between teams as equals have been key components of a strategic partnership between asset owner First State Super and HSBC Global Asset Management, according to high level figures from both organisations, as they discussed the advantages and challenges of their unique collaboration.
Differing from a traditional partnership, the collaboration began with the understanding there would be a significant amount of intellectual property transfer, although this transfer went both ways, participants told Investment Magazine’s Fiduciary Investors Digital Symposium held from May 19 to 20.
After developing an internal systematic (multi-factor) investment capability in Australian shares between 2017 and 2018, FSS wanted to expand its internal capability to include global multi-factor equities.
Ross Barry, head of systematic and impact investing with First State Super, said this decision wasn’t taken lightly. As a $105b pension fund with 800,000 members and ample resources, Barry said the fund only looks to internalise when it feels it can do something “as good as or better than you can buy in the market”.
FSS formed the view that creating a partnership would help prevent the inevitable mistakes that come with learning something new. The fund selected HSBC Global Asset Management as their Global Systematic Investment Partner to guide the process by managing a Global Multi-Factor Equity mandate of A$500m and providing research and investment modelling support to the internal FSS investment team. Money was invested from October 2019.
The partnership is unique in a number of ways. FSS was clear up front that it expected the partnership to involve a significant amount of intellectual property transfer.
“We were very open in our discussions with the groups that we spoke to about it that that’s what we were looking to do,” Barry said. “We wanted to make sure we had a commercial model and relationship model that supported us doing that in a sustainable way over many years.”
From HSBC’s perspective, intellectual property transfer ultimately went both ways. When experienced teams work together, both sides learn, said Vis Nayar, deputy chief investment officer, equities and head of systematic strategies at HSBC Global Management.
“I want to emphasise that when we talk about IP transfer, this isn’t code transfer,” Nayar said. “It’s actually a mutual discussion… so we will have pointers that come up about the research we are doing. I find it very valuable that even in that first year’s collaboration that the FSS team are effectively peer-reviewing some of our ideas.
“If they are not finding it convincing that tells us something about the research,” he added.
When reflecting on lessons learned, both sides agreed to high-level interaction between the teams as equals was a critical ingredient.
Another component for success was to start with a narrow scope then broaden it over time if it makes sense. Too many others do this the other way around, Nayar said, but from the start, FSS had a clearly defined vision of what it wanted from the relationship.
“People have historically had partnerships which have been quite broad, ones that can be quite hard to define,” Nayar said. “I’ve often viewed that as trying to maximise a perceived success rate [whereby] if you put it across four or five or six or seven things you might find something that works well and you can deem that… a success.”
HSBC saw an opportunity to work with a large asset owner in a focused way, while also looking at the possibility of helping in other ways and broadening the relationship later, Vis said.
A third important element of the relationship was that its two core components – the research partnership and the investment management mandate – were also kept separate, allowing one to be stopped independently of the other.
“We have got a schedule that makes sense for us on both components,” Nayar said. “They are all priced and it makes sense to both parties. Because one can end before the other, we have the same responsibility we always had – we have to deliver value to the client.”