HPAJ

Overview

HSBC MSCI Pacific ex Japan UCITS ETF USD (HPAJ) tracks the MSCI Pacific ex Japan index and holds its constituents directly, a physical replication managed by HSBC. Dividends are paid out to holders rather than reinvested, so HPAJ suits investors seeking regular income. The fund is domiciled in IE, which determines the withholding tax treatment applied to its dividends. Annual charges come to 0.15% of assets, and the fund holds 18M under management. Over the past year the fund returned 14.2%, a history too short to judge it on. It is not eligible for the French PEA, but can be held in a securities account, a UK ISA or a German Depot. Its risk level is rated medium. Launched on 2011-01-12, the fund is denominated in USD and has 15 years of track record. It is a UCITS fund, so it follows the European framework on diversification, liquidity and asset segregation. Because HPAJ distributes, every payment is taxable in the year it is received, against the dividend allowance in a general account, while it stays sheltered inside an ISA or a SIPP. Domicile in IE sets the withholding the fund itself suffers on the dividends it receives, a cost absent from the stated fee but present in the return.

Ongoing charges of 0.15% place this fund 78th of 225 comparable funds, whose median is 0.20%. On £10,000 that costs about 15 a year and 150 over ten years at a constant amount, deducted daily and never visible on a statement: it shows up in the gap between the fund's return and its index's. At this level, neither low enough to be an argument nor high enough to be an obstacle, the decision rests elsewhere: on the index tracked, on the distribution policy, and on what your broker charges to buy.

Replication is physical: the fund actually holds the constituents of MSCI Pacific ex Japan, which makes its contents verifiable line by line in the issuer's report. Two points deserve attention. Securities lending first, practised by most physical funds to reduce costs: it earns a few hundredths of a point and creates an exposure to the borrower, covered by collateral, with the annual report stating the proportion lent. Rebalancing second: every change in the index's composition forces the fund to buy and sell, and those internal costs are not in the 0.15% headline. That is why two funds at the same price do not track their index with the same fidelity.

The domicile, Ireland, is not an administrative detail: it determines the withholding tax the fund suffers on the dividends it receives, and that loss appears in no fee table. On US equities, the Ireland-US treaty cuts withholding from thirty to fifteen per cent, which on a world index is mechanically worth several tenths of a point a year and explains Irish dominance of this segment. For the holder, the UCITS framework also brings the key information document in their own language, diversification rules, and separation of the fund's assets from the issuer's.

Income is distributed: the fund pays out the dividends it receives, usually one to four times a year. For a holder living off the portfolio that is what is wanted, since the income arrives without selling. For someone still accumulating it is a tax disadvantage in a taxable account: each payment is taxed in the year received, so the amount reinvested is reduced before it starts working again. Reinvesting by hand also costs a dealing commission each time and often leaves cash idle for want of the price of a whole unit. An accumulating class on the same index, where one exists, settles the question.

At 18 million in assets, this fund is small, and size is the main risk here, ahead of the index's volatility. A fund that stays below its issuer's viability threshold ends up merged or wound up, and both happen without your consent: liquidation forces a sale on a date you did not choose, hence a taxable gain at the wrong moment, and a merger moves you to an index that is not quite the one you picked. Assets falling year after year are the signal to watch, more than the absolute level. At this size the spread between buying and selling price is also wider, which costs on every order.

MSCI Pacific ex Japan covers a single country, which concentrates three risks at once: its economy, its currency and its sector structure, since a national index reflects the country's industrial history rather than a chosen balance. A country position therefore makes sense to complete an already diversified portfolio, rarely to build one. The question to settle before buying is currency: a return published in one currency and real exposure to another diverge over several years, and a currency-hedged fund answers a different question, at the price of hedging costs that vary with the interest rate gap.

The published returns for this fund are incomplete, and that is itself information: without a multi-year record, the only available check is the structure, the 0.15% ongoing charge, 18 million in assets and the replication method. A recent or little-followed fund is not a bad fund for that reason, but it can only be judged on what is known in advance rather than on what it has done.

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