Report Release Date: 26 June 2009
Analyst: YT Kum
Executive Summary
People: The team backing this fund is reasonably stable, experienced and well-resourced.
Parent: Schroders is a large global investment manager with £114.7bn of assets under management.
Process: Bottom-up stock selection through both quantitative and qualitative criteria primarily dictates the look of the portfolio.
Performance: During her tenure, Lo has guided the fund to outperformance over its benchmark and category average.
Price: The fund’s TER is higher than the category median.
Morningstar Opinion
Schroder ISF Greater China Equity is an appealing choice for those who can handle the high volatility in the region.
This fund has a lot of things going for it. First, it is run by an experienced and robust investment team, which has the size and resources that few category peers can match. Schroder’s Asia ex-Japan investment desk encompasses 38 investment professionals, and 15 of them focus on Greater China equities, including two based on the ground in Shanghai. The fund also leverages the research produced by a joint venture company in Mainland China, which consists of 27 investment professionals. The breadth of the investment team gives them the ability to conduct intensive company visits, which we believe gives them an edge in a country that has had issues with transparency and corporate governance.
The fund’s greatest strength is portfolio manager Louisa Lo. Lo has shown herself to be a shrewd stock picker, as evinced by this fund’s results. She is also a risk-conscious investor who aims to protect shareholder’s capital. For example, in late 2007 as the bull market raged, Lo became uncomfortable with the high valuation levels in China, and she decisively dumped some cyclical stocks, such as Chinatrust Financial and China Shenhua Energy, in order to shape a more defensive portfolio.
Although the fund typically takes a long-term approach, Lo has shown an ability to act in the face of near-term uncertainty as shown during the recent financial crisis. To illustrate, in 2008, the team performed a series of “stress tests” on the fund holdings to make sure the investment rationale was still valid amid deteriorating economic conditions. The fund still posted a big loss, but it held up a bit better than its average peer in a brutal year. This ability to adapt to process new information through deep research is a key strength of this fund.
The strategy relies on bottom-up fundamental research supplemented by top-down themes. Management is price-conscious, but the team is not a big fan of one-size-fits-all valuation metrics, so it allows analysts the flexibility to pick appropriate valuation measures. Although this process is not radically different from the competition, we believe that the experienced team can put the flexibility to good use.
One negative here is the fund’s above average TER. It’s particularly disappointing considering the fact that this is one of the largest funds in the category. Given this fund’s large asset base, we’d like to see Schroder share some economies of scale with fund shareholders.
Aside from its high fees, this fund has much to praise. It has an experienced and talented manager, who is backed by extensive analytical resources and who has demonstrated an ability to execute a sensible strategy well. Accordingly, we think this fund is worthy of a Superior rating.
To learn more about the fund, please click here.
To read the full report, please click here.
