FIRM BROCHURE HSBC GLOBAL ASSET MANAGEMENT (USA) INC.

Transcription

1 1 HSBC Global Asset Management (USA) Inc. FIRM BROCHURE HSBC GLOBAL ASSET MANAGEMENT (USA) INC. 452 Fifth Avenue, 7 th Floor New York, NY Tel: Website: March 27, 2015 This brochure provides information about the qualifications and business practices of HSBC Global Asset Management (USA) Inc. If you have any questions about the contents of this brochure, please contact us at (212) The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission (the SEC ) or by any state securities authority. Additional information about HSBC Global Asset Management (USA) Inc. also is available on the SEC s website at HSBC Global Asset Management (USA) Inc. is a federally registered investment adviser with the SEC. Registration with the SEC or with any state securities authority does not imply a certain level of skill or training.

2 2 Item 2: Material Changes There were material changes made to the HSBC Global Asset Management (USA) Inc. ( AMUS ) (commonly referred to as the Brochure ) since the last annual update of the Brochure dated July 1, Please find below the Items to which AMUS made changes and a description of the changes therein. Item 4: Advisory Business AMUS updated its language with respect to additional investment strategies Item 5: Fees and Compensation AMUS added additional accounts that have launched after the the 2014 annual ADV filing and updated certain Standard Fee Schedules. Item 7: Types of Clients AMUS made changes to provide further details in respect of the foreign regulated funds it manages. Item 8: Methods of Analysis, Investment Strategies and Risk of Loss AMUS modified the wording for its Methods of Analysis to enhance clarity and disclosure regarding its investment analysis methods for different strategies and new strategies launched since the 2014 annual ADV filing. / Item 8B was updated to add additional risk factors. AMUS added Item 8C to include additional Bank Holding Company Act Disclosure. Item 11: Code of Ethics AMUS amended the wording in Item 11 to enhance clarity and disclosure regarding its Code of Ethics policies and provide enhanced details regarding transactions involving Related Persons and other Conflicts of Interest. Item 12: Brokerage Practices AMUS enhanced its disclosure related to practices regarding Best Execution, Broker Selection and Approval, Soft Dollars, and Affiliated Broker-Dealers. Item 13: Review of Accounts AMUS updated Item 13 to better describe its review process in respect of its accounts. Item 16: Investment Discretion

3 AMUS made changes to provide further details in respect of its investment discretion for certain types of accounts. Clients may request a copy of AMUS s current Brochure by contacting their client service representative or financial adviser. 3

4 4 Item 3: Table of Contents Item 2: Material Changes... 2 Item 3: Table of Contents... 4 Item 4: Advisory Business... 5 Item 5: Fees and Compensation Item 6: Performance-Based Fees and Side-by-Side Management Item 7: Types of Clients Item 8: Methods of Analysis, Investment Strategies and Risk of Loss Item 9: Disciplinary Information Item 10: Other Financial Industry Activities and Affiliations Item 11: Code of Ethics, Participation or Interest in Client Transactions and Personal Trading Item 12: Brokerage Practices Item 13: Review of Accounts Item 14: Client Referrals and Other Compensation Item 15: Custody Item 16: Investment Discretion Item 17: Voting Client Securities Item 18: Financial Information... 49

5 5 Item 4: Advisory Business A. GENERAL DESCRIPTION OF ADVISORY FIRM HSBC Global Asset Management (USA) Inc. ( AMUS ) is wholly owned by HSBC Bank USA, N.A. and is indirectly owned by HSBC Holdings plc ( HSBC Group ). HSBC Group is a publicly owned corporation based in London, U.K. and trades on various stock exchanges around the world. AMUS is registered with the SEC as an investment adviser pursuant to the Investment Advisers Act of 1940, as amended (the Advisers Act ). AMUS is an entity within HSBC Global Asset Management ( AMG ), which is made up of a group of companies in countries and territories throughout the world that are engaged in investment advisory and portfolio management activities. AMUS has been in business since January 29, B. TYPES OF ADVISORY SERVICES AMUS provides discretionary advisory services to clients in several major markets and is a multi-product provider of investment and fund management services. For institutions, AMUS provides active and tailored portfolio management on a global, regional, asset-class and country specific basis. AMUS also serves as investment adviser to U.S. registered investment companies. AMUS provides investment advisory services which include U.S. fixed income, Emerging Markets fixed income (including Asia, Latin America, Eastern Europe, the Middle East and Africa), Euro Fixed Income, Liquidity and Cash Management and Multi-Asset funds. Clients may sign investment advisory agreements directly with AMUS. AMUS may also provide investment advisory services through sub-advisory agreements with various affiliated and unaffiliated companies. C. INVESTMENT STRATEGIES Emerging Market Debt: strategies include emerging market debt core, emerging market local debt, emerging market corporate debt, emerging market investment grade debt, emerging market debt total return, Renminbi (RMB) fixed income and inflation linked bond. Emerging Market Equity: strategy includes frontier markets equity. Global Fixed Income: strategies include high yield andhigh income. Short-Term Fixed Income: strategies include short and low duration. U.S. Fixed Income: strategy includes investment grade and high-yield bonds. Liquidity/Cash Management: includes strategies that seek to provide liquidity and current

6 6 income consistent with the preservation of capital. Multi-Asset: funds of funds that seek to achieve their investment objectives by investing primarily in underlying funds in diversified asset classes. D. AFFILIATE AND SUB-ADVISORY RELATIONSHIPS AMUS may manage international or domestic accounts pursuant to sub-advisory agreements with affiliated entities. In these relationships AMUS provides investment advisory services to clients who sign an Investment Advisory Agreement directly with AMUS, or may act as subadviser for clients who sign Investment Advisory Agreements with other affiliated companies. AMUS can delegate investment management responsibilities, through sub-advisory agreements, to other affiliated companies and vice versa. AMUS may also delegate, through sub-advisory agreements to third-party asset managers. The client service relationship is generally maintained in the country where the client is located. AMUS serves as an investment adviser or sub-adviser for several offshore fund products. These offshore funds are not registered in the U.S. and are generally not offered for sale or sold in the U.S., except in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended. AMUS acts as investment sub-adviser to affiliated investment advisers, which provide discretionary investment advisory services to certain of its clients as previously noted. AMUS renders continuous investment advice for the portions of the portfolios for which it is selected as sub-adviser, and has investment discretion with respect thereto, subject to review and supervision by the affiliated advisers. E. FUNDS AMUS also serves as investment adviser to a family of registered investment companies organized in the form of the master-feeder structure: the HSBC Portfolios Trust, HSBC Funds Trust ( HSBC Trust ) and HSBC Advisor Funds Trust (collectively, HSBC Funds ). In addition, AMUS provides advisory services of a series of funds within the HSBC Funds for which AMUS receives a fee and all sub-advisers (including some which are affiliated with AMUS) receive fees for their services, as specified in the fund s prospectus. AMUS generally provides investment advice to institutional accounts which may include U.S. registered investment companies. HSBC WORLD SELECTION FUNDS In addition, AMUS is the investment adviser for the HSBC World Selection Funds pursuant to an investment advisory contract with the HSBC Trust. In rendering investment advisory services, AMUS may select affiliated funds, ETFs and/or third party funds. AMUS may rely on and utilize the research and expertise of affiliates and third parties in managing the Funds investments; in particular, AMUS relies on affiliate HSBC Global Asset Management (UK) Ltd. in respect of the HSBC World Selection Funds. Such relationships will and are documented in accordance with market practice.

7 The World Selection Funds are funds of funds that seek to achieve their investment objectives by investing primarily in underlying funds. The underlying funds may include mutual funds managed by AMUS, mutual funds that are managed by affiliates, mutual funds managed by investment advisers that are not associated with AMUS and exchange-traded funds, REITS or exchange-traded products (including notes). F. WEALTH PORTFOLIO MANAGEMENT Wealth Portfolio Management ( WPM ) team conducts research and due diligence on unaffiliated managers based upon both quantitative and qualitative factors and recommends selected managers for use. As part of the qualitative review, WPM may utilize firm and strategy questionnaires, strategy pitch books and conduct portfolio manager and research analyst interviews to assess the firm, investment staff, investment strategy and process, and portfolio construction. Style analytics, attribution analysis, risk and performance comparisons against representative benchmarks and peers may be used as part of the quantitative process. Recommended strategies are reviewed on a periodic basis with similar criteria used in the initial selection process. WPM also oversees the asset allocation models used in various Wealth products. WPM collaborates with various AMG teams to develop Strategic Asset Allocations ( SAA ) subject to local constraints (e.g., asset classes and risk tolerance bands). WPM may also implement Tactical Asset Allocation ( TAA ) views based on both global and local inputs. G. WRAP FEE PROGRAMS Managed Portfolio Account Program AMUS is the sponsor of a wrap fee account program, referred as the Managed Portfolio Account ( MPA ), which is a multi-product, fee-based separate account program. MPA offers two investment account options: Separately Managed Accounts ( SMAs ) or Unified Managed Accounts ( UMAs ). MPA is designed to assist clients, including individuals, pension plans, profit sharing plans, and institutions, with their investment needs based on financial objectives, time horizon and risk tolerance. It will also facilitate access to professional asset management and other services provided by AMUS, third party portfolio managers, mutual funds, and/or exchange traded funds ( ETFs ) for a single wrap fee. UMA may provide, at the client s election, tax optimization services, at no additional cost, to U.S. persons, for U.S. taxes only. HSBC Spectrum Account AMUS sponsors the HSBC Spectrum Account ( Spectrum ) which is a mutual fund asset allocation service open to U.S. persons. Spectrum investors receive asset allocation, discretionary investment management and trade execution services with respect to the assets invested in the accounts ( the Spectrum Program ). A qualified adviser undertakes an assessment of the clients investment needs, attitude to investment risk and likely time horizon of investment and a suitable multi-asset model ( Profile ) is recommended. Assets in the Spectrum Program can be invested in ETFs and shares of open-end and closed-end investment companies, some of which will be managed or 7

8 advised by AMUS or an affiliate of AMUS. Upon the opening of a client s account (and at any time while a client s account is open), the client will be able to select from a variety of funds that have investment objectives and policies corresponding to such client s investment allocation. AMUS or its affiliates will receive compensation from funds that are advised by AMUS and its affiliates in addition to the fee for the Spectrum Program described below. However, Spectrum Program fees for retirement accounts are reduced by the amount of the advisory fee for funds advised by AMUS. To the extent AMUS selects the funds in which a client s account will be invested, the receipt of such additional compensation could create a conflict of interest for AMUS. AMUS discloses the additional compensation to clients of the Spectrum Program as part of the application process. Spectrum Program - Funds The funds made available through the Spectrum Program include both third party funds and funds advised by AMUS and its affiliates. Third party funds used within the Spectrum Program are those that have been approved for use by the Retail Banking and Wealth Management division of HSBC ( RBWM ) and are aligned with the asset classes offered within the Spectrum Program s models. These approved funds are selected from funds offered by a set of globally approved fund companies identified by RBWM as core providers of product in the US market. All HSBC Funds aligned with Spectrum Program asset classes are eligible for inclusion in the Spectrum Program. Funds and ETFs included in the Spectrum Program are re-evaluated on a periodic basis and if any are identified as not meeting investment or other criteria, they may be deemed as not approved, resulting in such funds being removed from the Spectrum Program and outlining the suggested alternative option. In this case, notice will be sent to all clients stating that the fund is being removed from the Spectrum Program and indicating a default fund which will be purchased as the replacement fund if no alternative is selected by the client by the deadline indicated. Clients are instructed to discuss their options with their Investment Adviser Representative ( IAR ) upon receipt of the notice. Spectrum Program Model Revisions and Rebalancing The asset allocation model selected in connection with the client s initial Profile is periodically reviewed during meetings between the client and their financial adviser. A different model may be selected based upon an updated assessment of the client s goals, financial circumstances, preferences and instructions, as well as market and economic circumstances. AMUS may reallocate assets at any time, without consulting the client, in order to respond to market or economic circumstances, or to re-balance to position the portfolios in line with the inhouse market views. Modifications to investment allocations may include the introduction of new asset classes or new model options as well as the removal of asset classes or model options. AMUS will have discretionary investment authority consistent with the Profile over the assets invested in the Spectrum Program, including discretion to allocate assets to securities other than shares of open-end and closed-end investment companies if AMUS determines that it is in the best interests of the client to do so. 8

9 Periodic rebalancing of accounts to the target portfolio, as well as the allocation of subsequent investments and partial withdrawals, is subject to minimum trade size requirements and asset class thresholds. Spectrum Program - Use of Third Parties, Brokers Orders for the Spectrum Program may be placed with brokers and dealers for the purchase and sale of investments for the accounts. Currently HSBC Securities (USA) Inc. ( HSBC Securities ), member NYSE/FINRA/SIPC, registered Futures Commission Merchant ( FCM ), a wholly-owned subsidiary of HSBC Markets (USA) Inc. and an indirect wholly-owned subsidiary of HSBC Holdings plc., acts as introducing broker in respect of the Spectrum Program, using the clearing and execution facilities of its third party clearing broker, Pershing LLC, in respect of all securities transactions executed within a client s account, subject in all cases to best execution obligations and applicable law. HSBC Securities or another financial intermediary will serve as custodian for accounts. HSBC Securities has entered into an agreement with Pershing LLC to perform as the custodian under the Spectrum Program. The Spectrum Program offers a bundled asset based fee arrangement to clients of which AMUS retains a portion of the fees for its services. Spectrum - Legacy Models There is a set of legacy mutual fund wrap models, known as Spectrum I (as of June 30, 2014). These models were closed to new investors on October 30, Accounts with the legacy models are still being rebalanced to their selected asset allocation but new clients are not permitted, and any clients wishing to change models must transition to the current Spectrum models. Additional information is available upon request. H. INVESTMENT RESTRICTIONS AMUS provides investment advisory services in accordance with the client s investment objectives, guidelines and restrictions. Where AMUS is a sub-advisor to a mandate or an affiliate is a sub-advisor to an AMUS mandate, the responsibility of the investment manager is generally limited to the portion of the assets of the account under its management through the sub-advised agreement. Investment objectives and guidelines may be amended as agreed by the client and AMUS from time to time. I. SEED CAPITAL AMG will from time to time use its own capital within newly launched funds, to mitigate the initial costs to investors when the funds are small and reduce the impact of transaction and other trading costs; while still providing access to the intended asset class with full diversification. J. REGULATORY ASSETS UNDER MANAGEMENT For the period ending December 31, 2014, AMUS s regulatory assets under management were $66,452,428,128 representing client assets managed on a discretionary and non-discretionary basis. 9

10 10 Item 5: Fees and Compensation A. ADVISORY FEES AND COMPENSATION Advisory fees may be charged in arrears or in advance dependent on the client agreement. Typically these will be assessed on a quarterly basis. For most accounts, fees are calculated based on the account s average market value for the quarter. Generally, the quarterly average market value for the period is based on the three month-end asset values as stated on the client s custodian statements. Fees for the initial billing, at the inception of the account, are pro-rated accordingly. If, during the period, the client makes a contribution to the portfolio, fees will be pro-rated accordingly. In the event the client terminates an account or withdraws any funds from the portfolio, any fees owed to AMUS will be pro-rated accordingly, any fees that may have been prepaid previously by the client shall be refunded on a pro-rata basis based upon the number of calendar days remaining after the termination date in the period as to which fees may have been prepaid. The client or AMUS generally may terminate an investment advisory agreement at such time as mutually agreed upon in writing by AMUS and the client. AMUS is a fee only investment adviser, and other than the fees described herein, neither AMUS nor its employees receive or accept any direct or indirect compensation related to investments that are purchased or sold for its client accounts. This means that clients will not be sold products or services that create additional fees or compensation to benefit AMUS or its employees or its affiliates other than those described in this brochure. Sub-Adviser Mandates Typically, AMUS s sub-advisory fee for segregated accounts is approximately one half of the fee paid by the client for investment management activities. For mutual funds that AMUS subadvises, the respective mutual fund s adviser (not AMUS) typically provides administrative, marketing and shareholder services, including any necessary disclosures to shareholders. AMUS as Investment Advisor For offshore separate or institutional accounts where AMUS contracts directly with the client or mutual fund management company, AMUS receives approximately one half of the investment management related fee. AMUS receives the full investment management-related advisor fee for domestic separate or institutional accounts. Offshore Products AMUS serves as an investment adviser or sub-adviser for several offshore fund products. These offshore funds are not registered in the U.S. and are generally not offered for sale or sold in the U.S., except in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended. Fees and expenses vary with each fund.

11 11 Institutional Client Accounts The fee structures for AMUS s institutional client account portfolios will vary according to investment strategy and negotiations with the client at the time of contract. These investment strategies can have minimum investment limits and minimum annual fees. At this time, all of AMUS s separately managed account clients are considered qualified purchasers as defined by the Investment Company Act of To paraphrase the requirements under Section 2(a)(51) of the Investment Company Act, a qualified purchaser means: a person with not less than $5 million in investments a company with not less than $5 million in investments owned by close family members a trust, not formed for the investment, with not less than $5 million in investments an investment manager with not less than $25 million under management a company with not less than $25 million of investments General management fee structures for each investment strategy are available upon request and are subject to negotiation for an executed advisory agreement. In addition to management fees, some strategies may also have performance-based fees associated with them. Performance-based fees are defined as fees based on a share of capital gains on or capital appreciation of the assets of a client. See Item 6: Performance-Based Fees and Side-By-Side Management for a further discussion of this type of fee arrangement. MPA Fees are charged quarterly in advance. Fees will be a percentage of assets in the account based on the market value as of the last business day of the previous calendar quarter. The fee covers all advisory, administrative, custodial and brokerage services under the MPA Program with the exception of any step out trades and mark-ups or markdowns or certain other fees or costs as described in the MPA Program client agreement. Related accounts may be entitled to discounted fees. To determine if a client's related account is eligible for discount, clients should contact their IAR. In respect of the fees charged by AMUS generally, the client authorizes the Custodian to deduct such fees directly from the client s account, and then Custodian will pay AMUS directly. Fees for each new or terminated account will be pro- rated for the appropriate number of days in the billing period. New client accounts will be charged a fee in advance based on the inception value of the account through the end of the first quarter AUM. Terminated accounts will receive a rebate of fees charged in advance and not earned based on the prorated fee that was charged for the balance of the quarter. In addition, contributions in excess of $25,000 cash or equivalent value of in kind securities would be charged an additional fee at the time the contribution is made to the portfolio pro-rated through the end of the quarter. Withdrawals of cash or equivalent market value of in kind securities in excess of $25,000 would generate a fee refund pro-rated to the end of the quarter. The current MPA Program fee schedules for SMA and UMA are detailed in the following schedule: SMA: All Fixed Income All Equity

12 12 Total Portfolio Assets Under Management: Fee rate (per annum) on assets: L1 First $500, % 2.50% Next $500, % 2.00% Over $1,000, % 1.50% UMA: Standard Fee Schedule for accounts opened on or after November 10, 2014: Model: Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Total Portfolio Assets Under Management: Fee rate (per annum) on assets: L1 First $500, % 1.60% 1.70% 2.15% 2.50% Next $500, % 1.30% 1.35% 1.70% 2.00% Over $1,000, % 0.95% 1.00% 1.30% 1.50% Standard Fee Schedule for accounts opened on or after December 20, 2013: Model: Moderate Moderately Aggressive Aggressive Equity / Fixed Income (& money market) allocation (+/- 5%) Total Portfolio Assets Under Management: 35% / 65% 60% / 40% 100% / 0% Fee rate (per annum) on assets: L1 First $500, % 2.15% 2.50% Next $500, % 1.70% 2.00% Over $1,000, % 1.30% 1.50% Standard Fee Schedule for accounts opened prior to December 20, 2013: Model: Conservative Income & Growth Balanced Balanced with Growth Growth & Income Growth All Equity Total Fixed Income & money market (+/- 5%) 65% 55% 50% 40% 35% 20% 1% Total Portfolio Assets Under Management: Fee rate (per annum) on assets: L1 First $500, % 1.85% 2.00% 2.15% 2.25% 2.40% 2.50% Next $500, % 1.50% 1.60% 1.70% 1.80% 1.90% 2.00% Over $1,000, % 1.15% 1.20% 1.30% 1.35% 1.50% 1.50% L1 Fiduciaries of ERISA and Tax Qualified Plans should refer to Section 4(f) of the advisory agreement for a discussion of certain credits applicable in the event investments are made in affiliated mutual funds. Spectrum Program

13 Spectrum Program fees are paid quarterly in arrears. The service fees payable for any calendar quarter will be based on the average daily account asset value during the prior calendar quarter and the annual fee rate(s) set forth in the following schedule, subject to a minimum fee. Minimum fees for accounts are based on minimum account size. Spectrum clients pay a single fee for the services provided through the Spectrum Program which include brokerage, custody and other services provided by AMUS, HSBC Securities and the custodian (other than fees and expenses, including investment advisory fees, paid in respect of underlying mutual fund investments),. All fund investments incur separate operating expenses, including advisory, administrative, shareholder servicing and custodial fees. Clients will bear their proportional share of the operating expenses of the funds in which they are invested, which will be in addition to, and not included in, the Spectrum Program s fees, as set forth below. HSBC Spectrum Accounts (Spectrum I and HSBC Spectrum) Standard Fee Schedule for accounts opened on or after January 2, 2007: Average Assets: Annual Rate: Minimum Fee at Account Level: First $250, % $ Next $250, % $ Assets in excess of $500, % $ Minimum fees for accounts are based on minimum accounts size. AMUS reserves the right to reduce or waive the minimum fee at any time. HSBC Spectrum Accounts (Spectrum I only) Standard Fee Schedule for accounts opened prior to January 2, 2007: Account Type: Annual Rate: Minimum Fee at Account Level: Non-Retirement 1.25% $ (less than $200,000 average assets) Non-Retirement 1.00% $ (greater than $200,000 average assets) Retirement and Non-Resident Alien 1.50% $ (less than $200,000 average assets) Retirement and Non-Resident Alien 1.25% $ (greater than $200,000 average assets) 13

14 14 HSBC Funds AMUS serves as investment adviser to a family of registered investment companies, known as the HSBC Funds. AMUS provides advisory services to the following series of funds within the HSBC Funds for which AMUS receives a fee based on average daily net assets, as specified in the funds prospectuses which are publicly available on HSBC s website or on the EDGAR Database on the SEC s website ( Please refer to the fund prospectus for a detailed description of each fund s shareholder fee structure and fund operating expenses. 1. Money Market Funds HSBC Prime Money Market Fund HSBC US Treasury Money Market Fund HSBC US Government Money Market Fund 2. US Equity Funds HSBC Opportunity Fund HSBC Opportunity I Shares HSBC Growth Fund 3. Emerging Markets Funds Emerging Markets Debt Fund Emerging Markets Local Debt Fund RMB Fixed Income Fund Frontier Markets Fund Total Return Fund HSBC Asia Ex-Japan Smaller Companies Equity Fund 4. Multi-Asset Funds HSBC World Selection Funds: Aggressive Strategy Fund Balanced Strategy Fund Moderate Strategy Fund Conservative Strategy Fund Income Strategy Fund Wealth Portfolio Management WPM provides advisory services on behalf of the Spectrum and MPA Programs, Multi-Asset Funds and the US Equity Funds listed above. WPM receives their fees for manager selection and/or asset allocation services provided to these programs/funds which are imbedded in the overall advisory fee. Any fees charged to the programs/funds do not include custody costs. Generally, fees are paid in accordance with the program/fund fee agreements described above.

15 15 B. OTHER FEES AND EXPENSES Clients will pay brokerage and custody fees. See Item 12: Brokerage Practices. As with all mutual funds, including money market funds, clients, through their fund investments are charged their pro-rata share of the fund s fees and expenses. Clients may elect to have their idle cash balances swept into money market funds, including funds that are managed by AMUS or an affiliated company. If a client chooses to invest in an AMUS or affiliate managed money market fund, the client should be aware that as fund manager, AMUS or the affiliate will receive a management fee from the fund in addition to the advisory fee paid by the client for the management of their entire portfolio, inclusive of the fund investments. In addition, AMUS, in its capacity as investment adviser, may invest client assets in affiliated mutual funds other than money market funds, advised by AMUS or an affiliated company. If the client s account is subject to the Employee Retirement Income Security Act of 1974, as amended ( ERISA ) clients are given an appropriate fee adjustment for any holdings in the affiliated mutual funds. The client is responsible for all other expenses and fees associated with an investment in the funds. These fees and expenses may include but are not limited to, distribution (12b-1) fees, advisory fees, and custodial fees, and any sales load incurred with the purchase or sale of the funds. Expenses and fees vary with each fund. The client should read the fund s prospectus for a complete description of the fund s fee structure.

16 16 Item 6: Performance-Based Fees and Side-by-Side Management A. PERFORMANCE-BASED FEES In some cases, AMUS has entered into performance fee arrangements with qualified clients and such fees are subject to individualized negotiation with each such client. AMUS will structure any performance or incentive fee arrangement subject to Section 205(a)(1) of the Advisers Act in accordance with the available exemptions thereunder, including the exemption set forth in Rule In measuring clients assets for the calculation of performance-based fees, AMUS shall include realized and unrealized capital gains and losses. Performance based fee arrangements may create an incentive for AMUS to recommend investments which may be riskier or more speculative than those which would be recommended under a different fee arrangement. Such fee arrangements also may create an incentive to favor higher fee paying accounts over other accounts in the allocation of investment opportunities. AMUS has procedures designed and implemented to ensure that all clients are treated fairly and equally, and to prevent this conflict from influencing the allocation of investment opportunities among clients. B. SIDE-BY-SIDE MANAGEMENT AMUS provides investment management advice to a variety of different clients including mutual funds, sub-advisory relationships, institutional accounts, ERISA accounts and other pooled vehicles such as privately offered funds. Some of these accounts present a conflict of interest to AMUS as our employees or affiliates may have an interest in such accounts. AMUS also manages several accounts that pay performance fees. Certain investment professionals manage both accounts with and without such conflicts of interest. This conflict may be an incentive to favor one account over another account. AMUS recognizes these and other potential conflicts and have designed order allocation procedures to ensure that clients are treated fairly. General Trading Policies and Procedures Compliance or other designated control groups generally review, on a routine basis, transactions in securities. Compliance and Risk may use automated monitoring systems (including front-end and back-end systems) to assist in the identification of questionable trades and trading patterns, or may compare trades on a manual basis. This review is done in an effort to assess whether trades, including trade allocations, cross trades or other transactions were undertaken in a fair and equitable manner consistent with AMUS s fiduciary obligations. Written explanations or written prior approvals of certain trades and allocations are required by certain transactions including cross trades. Cross trades are defined as orders to execute a buy and sell in the same security outside of the exchange for two different clients.

17 17 Item 7: Types of Clients AMUS may provide investment advisory/sub-advisory services to individuals, high net worth individuals, corporate pension and profit-sharing plans, Taft-Hartley plans, charitable institutions, foundations, endowments, corporations, municipalities, registered mutual funds, private investment funds, trust programs, sovereign wealth funds, European funds regulated under the Undertakings for Collective Investment in Transferable Securities Directive ( UCITS Directive ) or the Alternative Investment Fund Managers Directive ( AIFMD Directive ) and each applicable jurisdiction s local implementing regulations, other foreign regulated collective investment vehicles, mutual funds, trusts, and separate accounts and other U.S. and international institutions, including financial institutions.

18 18 Item 8: Methods of Analysis, Investment Strategies and Risk of Loss A. METHODS OF ANALYSIS AND INVESTMENT STRATEGIES AMUS s objective is to actively manage focused investment strategies that are responsive to client needs while delivering competitive results. AMUS s investment teams are supported by global portfolio management and research platforms which provide in-depth analysis and shared communication. AMUS utilizes qualitative and as appropriate quantitative research and inputs in our investment strategies. Active risk management is integral to all of AMUS s investment processes. In general, the AMUS method of qualitative analysis is fundamentally research oriented, drawing on the following resources: (i) the experience of AMUS s portfolio managers; (ii) AMUS s research analysts; (iii) AMUS s access to its affiliated emerging markets and developed markets investment professionals (macro-economists, credit analysts, quantitative research and portfolio management teams) located in key locations around the world; and (iv) research data bases. Set forth below are the principle methods of analysis that AMUS uses for its significant investment strategies. Fixed Income AMUS executes three principle strategies for our clients that have interest in the fixed income market. These strategies, as further described below, are intended to provide clients with consistent returns with disciplined risk management focus and superior analysis. 1. Investment Grade The Investment Grade Fixed Income strategy aims to maximize income while attempting to minimize the risk of capital depreciation. The investment team seeks to achieve this objective by applying a diversified strategy focused on high-quality fixed-income instruments. Primary alpha sources include security and sector selection, duration positioning and yield curve positioning. As used in this document, alpha refers to the excess return over an applicable benchmark. Portfolio managers construct fixed income portfolios based on each client s unique objectives and constraints. As part of this process, the team utilizes the expertise of specialized credit research analysts. The first step of the investment process is risk budgeting which involves determining the target alpha that AMUS believes can be generated over various market cycles and the risk characteristics of the portfolio. The expected tracking error is also established which indicates the level of risk needed in order to achieve the desired amount of alpha. Second is the process of opportunity assessment, to identify opportunities in both credits and rates. The credit process is primarily bottom-up and bond selection has typically been the primary source of alpha in the credit portion of the portfolios. Investment decisions are made within a framework of valuation factors and credit fundamentals that can be specific to

19 issuers or influenced by top-down factors. For rate decisions the portfolio managers rely on the recommendations of the AMG Rate Committee, the lead decision maker on rates for US strategies. Rates decisions allow AMUS to exploit additional opportunities to generate alpha while minimizing the portfolio risks by reducing the overall correlation of the strategies implemented in portfolios. Next, the portfolio is constructed within the confines of client investment guidelines within the investment management agreement and the investment recommendations of credit analysts and the Rate Committee. Portfolio managers carefully assess the risk/return profiles of all instruments to determine the best way to implement the strategy. Risk monitoring is the final step in the process. The investment team will assess the risk of the portfolio on a daily basis. This ongoing risk monitoring process ensures that the team adheres to both strategy and client-specific guidelines. In sum, the AMUS fixed income process combines a top-down economic view with bottom-up research driven credit selection. Primary sources of alpha are security and sector selection. AMUS also employs active duration and yield curve positioning. 2. High Yield HSBC Global Asset Management's fixed income management teams aim to build portfolios that deliver strong risk-adjusted performance over the long term. AMUS s credit investment process is primarily bottom-up, focusing on bond selection. AMUS employs global credit investment resources for the High Yield strategy. The focus is on credit quality at the issuer level and AMUS believes it can best provide this through research-based local management of assets. USD assets are managed in the US and EUR assets are managed in our affiliated Asset Management entity in Paris, France (also a SEC registered investment adviser). In some instances we may provide active allocation between these two related asset classes to provide superior diversification and lower the correlation of returns. USD and EUR assets are supported by the local specialist credit teams. These credit teams also work very closely with our global credit analysts located in HSBC Global Management s regional and local offices around the world. AMUS seeks to provide attractive risk-adjusted returns through multiple sources of risk. These sources of risk typically have good information ratios and low correlations with each other. AMUS sets risk budgets for each mandate which reflect the client risk tolerance, alpha opportunities and the benefits of diversification. The credit risk that AMUS takes through issuer selection is usually supplemented with beta, sector, allocation and duration decisions. Credit decisions are based on valuation, fundamental and technical factors. Decisions are usually taken on a medium term basis and AMUS would not anticipate a high level of turnover in the portfolio. 3. Emerging Markets Fixed Income AMUS s approach to managing emerging markets debt assets is based on the belief that broad structural sources of inefficiency in the asset class create a wide range of alpha opportunities for investors to exploit. AMUS s investment thesis is based on research and 19

20 relative valuation analysis, allowing us to detect inconsistencies between instruments (securities, sectors, countries and currencies), asset prices and long-term theoretical values. AMUS employs both fundamental analysis and quantitative tools to continually reassess opportunities and combine multiple, uncorrelated alpha sources according to our risk budgeting process to maximize information ratios. The investment process begins with the evaluation of a set of top-down variables (macro variables for external debt credit, local currencies and rates, and credit variables for corporate credit), in order to build a ranking of country credits, currencies, rates curves and companies based on their relative attractiveness. Next, AMUS will evaluate whether asset prices are reflecting AMUS s views on relative attractiveness. AMUS separately evaluates both local rates and local currency assets to identify the best investment ideas. When AMUS identifies divergences between fundamental views and what the market is pricing, AMUS builds a model portfolio that maximizes the profit from such divergences. Finally, AMUS stress tests the portfolio in order to ensure that the sizing of positions will allow AMUS to meet outperformance and tracking error targets. Liquidity Liquidity is managed by AMUS under the HSBC philosophy that liquidity management must be focused on risk management. AMUS s primary responsibility to investors is to preserve capital and provide liquidity, not to deliver a higher risk/return outcome. There is little differentiation of risk, and hence pricing, across top tier issuers in the money markets. Through professional management the different types of risk can be understood and differentiation be achieved. AMUS s investment process seeks to manage credit, liquidity, and interest rate risks. The Liquidity investment process is designed to manage the primary risks associated with liquidity products credit and liquidity factoring in the regulatory and investment guidelines associated with managing liquidity assets. Investment governance is conducted through the Liquidity Credit and Investment Committee whose members include the Global CIO - Liquidity, Regional Liquidity CIOs, dedicated credit analysts and local portfolio management teams. It factors a macro economic review of current market conditions and global economic forecast. The role of this committee, in part, is to determine the approved issuer list and to approve maximum tenor and exposure limits for each issuer. Multi-Asset AMUS manages a number of programs and funds using the fund of funds concept meaning that it seeks to achieve its investment objective by investing primarily in underlying funds. The underlying funds may include mutual funds managed by AMUS or mutual funds managed by third parties. Investment may also be made in exchange traded funds ( ETFs ) managed by investment advisers that are not associated with AMUS. AMUS may also purchase or hold exchange traded notes ( ETNs ), which are debt securities issued by financial institutions that pay returns based on the performance of a market index or other reference asset. AMUS oversees the asset allocation models used in Multi-Asset products. AMUS collaborates with various HSBC Global Asset Management teams to develop Strategic Asset Allocations ( SAA ) subject to local constraints (e.g., asset classes and risk tolerance bands) and also 20

21 implements Tactical Asset Allocation ( TAA ) views based on both global and local inputs. AMUS considers a number of factors when determining whether to change a target asset allocation, including market trends, its outlook for companies with a given market capitalization, its outlook for asset classes, its outlook for sectors within asset classes, and such sectors performance in various market conditions. This means that AMUS, at its discretion, may change the target asset allocation periodically. AMUS chooses underlying funds, ETFs and ETNs for investment using a process involving quantitative and qualitative factors to determine how well the underlying fund, ETF or ETN represents its asset class. AMUS will redeem or sell an investment in an underlying fund, ETF or ETN if we determine that there is a better alternative selection. The underlying investments may include U.S. and foreign equity securities (including emerging market securities), investment grade, lower quality corporate and governmental fixed income securities. The underlying funds also may invest in financial instruments such as swaps and other derivatives to gain exposure to a particular group of securities, an index or an asset class (such as commodities), or to hedge a position. AMUS may invest in alternative asset classes such as real estate, hedge funds, private equity and commodities using products that are organized as mutual funds or ETFs. The percentage weightings are targets that may be adjusted at AMUS s discretion. Equity AMUS is the investment adviser to a number of equity mutual funds but does not manage these funds directly. Rather AMUS appoints a sub-advisor (which is an SEC registered investment adviser) with proven expertise in the given asset class. For the AMUS Growth and Opportunity Funds, AMUS uses a process involving quantitative and qualitative factors to determine how well the underlying fund manager represents its asset class. In addition, a due diligence process is utilized to determine the choice of a sub-adviser and AMUS exercises ongoing oversight of these contracted parties. The Frontier Markets investment strategy is managed by an AMUS affiliate, HSBC Global Asset Management (UK) Ltd., which is also an SEC registered investment adviser. When investing in frontier markets, the sub-adviser follows a disciplined, fundamental, bottom-up approach to investing, using a multi-factor process to evaluate countries and companies. The team believes that cash flow ultimately drives long-term stock returns, and this is critical to the stock selection analysis and ability to capture the intrinsic value of potential investments. The team believes that by employing this process, understanding local markets and having access to local information and proprietary fundamental research, portfolios that offer growth potential unrivalled by developed markets and even mainstream emerging markets can be constructed. In addition, the Asia-ex Japan Smaller Companies investment strategy is managed by an AMUS affiliate, HSBC Global Asset Management (Hong Kong) Ltd., which is also an SEC registered investment adviser. When investing the sub-advisor will select investments for purchase and sale through bottom-up fundamental stock analysis. The team assembles an investable universe of companies that meet its size and liquidity requirement, across ten countries. It then seeks to invest in companies from that universe that are attractively valued for a given level of profitability, with the potential for capital appreciation over the medium-to-long term horizon. The Subadviser s analysis is based on an individual assessment of, among other things, a 21

22 company s business model and strategy, shareholder structure, balance sheet, drivers of profitability, competitive positioning, earnings outlook and corporate governance. B. MATERIAL, SIGNIFICANT OR UNUSUAL RISKS RELATING TO INVESTMENT STRATEGIES AMUS uses a variety of investment strategies depending on the requirements of the client and the investment guidelines associated with the client s account. All strategies are subject to risk and an account or fund may not achieve its objective if AMUS s expectations regarding particular securities or markets are not met. AMUS discloses risk factors for a particular strategy to the client, and in the case of pooled investment funds, discloses risk factors associated with the fund s investment strategy in the prospectus, offering memorandum or other materials of the fund. Set forth below are certain material risk factors that are often associated with the investment strategies and types of investments relevant to most of AMUS s clients. The information included in this brochure does not include every potential risk associated with each investment strategy or applicable to a particular client account. Not all risks are applicable to all products. Clients are urged to ask questions regarding risk factors applicable to a particular strategy or investment product, read all product-specific risk disclosures and determine whether a particular investment strategy or type of security is suitable for their account in light of their circumstances, investment objectives and financial situation. Allocation Risk: The risk that the Adviser s target asset and sector allocations and changes in target asset and sector allocations cause the portfolio to underperform other similar funds or cause you to lose money, and that the portfolio may not achieve its target asset and sector allocations. Asset-Backed Security Risk: Asset-backed securities are debt instruments that are secured by interests in pools of financial assets, such as credit card or automobile receivables. The value of these securities will be influenced by the factors affecting the assets underlying such securities, changes in interest rates, changes in default rates of borrowers and private insurers or deteriorating economic conditions. During periods of declining asset values, asset-backed securities may be difficult to value or become more volatile and/or illiquid. Asset-backed securities may not have the benefit of a security interest in collateral comparable to that of mortgage assets, resulting in additional credit risk. Banking Risk: Investments in securities issued by U.S. and foreign banks can be sensitive to changes in government regulation and interest rates and to economic downturns in the United States and abroad, and susceptible to risks associated with the financial services sector. Capitalization Risk: Stocks of large capitalization companies may be volatile in the event of earnings disappointments or other financial developments. Medium and smaller capitalization companies may involve greater risks due to limited product lines, market and financial or managerial resources, as well as have more volatile stock prices and the potential for greater declines in stock prices in response to selling pressure. Small capitalization companies generally have more risk than medium capitalization companies. 22