We in Hong Kong are more or less used to be fed by ad after ad. Fund houses somehow manage to squeeze their commercial messages in every corner in the city promoting the big funds you probably have invested in. This is only the tip of the iceberg of funds distributed to Hong Kong investors and many outstanding but smaller funds with limited publicity are hidden beneath.
Why Do We Care About Fund Size?
Indeed, fund size isn’t directly indicative of how well a fund performs. That said, the size metric determines other attributes of a fund, such as agility and popularity. Size tells whether a manager has room to maneuver without diluting existing shareholders’ returns. As funds swell to an ungainly size, it’s possible that managers have no choice but to invest in their next-best ideas or to add to existing positions at less-than-compelling valuations. This risks the effectiveness of a strategy. Also, in extreme yet likely events of a market crunch (like what happened in March 2020), undesirably large fund assets will make managers vulnerable to jitters and outflows as sizable holdings might impede selling. On contrary, smaller funds may have less of a concern of reaching their capacity limit and drifting from ideas of the highest conviction.
Using Morningstar’s definition of funds, we screened a list of funds that are likely out of the spotlight but are likely to outperform peers and benchmarks on a forward-looking basis. They have US$200 million or less in assets and are rated with Morningstar Analyst Rating of Bronze or better. Here’s the list:
Little funds do not mean that they necessarily fall into the small-cap group in Morningstar style box. All in the screen invest in different styles of large-cap stocks. Interestingly, among these eight funds, half of them are managed by fund firms with a strong foothold locally, like First Sentier Investors and Matthews Asia. By investment focus, most of them are equity funds that invest with a single or regional market in focus, which is a typical product that allows investors to fit a certain exposure of high conviction to complete a diversified portfolio.
ASI Latin American Equity Fund (LU0396315128), incepted in 2011, is time-tested and consistent and the six-member team is supported by the depth of analytical resource of the group’s emerging-markets team. We give it Morningstar Analyst Rating of Bronze because we're impressed by its focus on quality companies with strong franchises and robust balance sheets should help the strategy to outperform over the cycle. The strategy, Despite a quality focus, the fund underperformed in a down market in 2020 due to a significant bias towards companies linked to domestic consumption that were badly hit by the pandemic. But the long-term performance going back to 2017 is solid.
Capital Group Japan Equity Fund ‘s (LU1577354035) long-tenured and stable management team earns its cheapest share classes Morningstar Analyst Ratings of Bronze. This strategy shows promise as a compelling core offering within the Japanese stock market. The group has an exceptional approach to ensuring analysts are well-trained and that they are groomed for many years in selecting stocks and constructing portfolios prior to being appointed as named managers. The large and well-resourced team means that tacit knowledge is widely spread; key-person risk is nonexistent here.
Capital Group AMCAP Fund (LU0817826448) is managed by an eight-manager team that seeks reasonably priced growth stocks that it intends to hold for the long haul. The strategy’s stand ability to out through varied market cycles makes it a stellar long-term option and led us to give a Silver rating to the US$174 million fund. The growth-titled portfolio owns a mix of known names like FAANG stocks (except Apple that is not in its top ten) as well as smaller-scale firms such as innovative healthcare firm Abbott Laboratories (ABT) and chip designer Broadcom (AVGO).
FSSA Hong Kong Growth Fund (IE0008369823) is managed by longstanding manager Martin Lau, who has been leading the strategy since 2002. In the process, Lau and the FSSA team look to identify quality growth companies at reasonable valuations, with particular attention paid to management quality. Preference is given to companies with management teams that act with integrity, have high governance standards, have a demonstrable track record of allocating capital effectively, and are well-aligned with minority shareholders. Trademarks of the process include its absolute return focus, low portfolio turnover, and benchmark-agnostic approach.
Stewart Investors Worldwide Leaders Sustainability Fund (IE0008368304) invests in global equities, with a focus on quality, specifically that of management, franchises, and financials. As its strategy names suggest, the fund also prefers companies contributing to a more sustainable future, whilst shunning away from those that face sustainability-related headwinds. Such focus enables the fund to arrive at an aggregate result of low levels of debt and high returns on assets in the portfolio, which is far superior to the benchmark and peers. While it has long favored defensive areas like consumer staples, the team has recently moved into healthcare and technology names, but it doesn't own the popular, high-flying names. Cybersecurity solution providers Fortinet (FTNT) and Nestle (NESN) among the top portfolio holdings.
Stewart Investors Global Emerging Markets Leaders Fund (IE00B0169N27) invests with high active share and a consistent small/mid-cap tilt. Edinburgh-based Tom Prew, the manager of the strategy, has a preference for durable business models, high-integrity management teams, and limited regulatory/political oversight. Prew is also valuation-conscious. This approach has led to a persistent overweighting to India at the expense of China. However, the lack of China exposure and a tilt away from large-growth stocks have been a meaningful headwind to its recent performance. That said, we continue to believe the strategy has high alpha potential on a go-forward basis.
Jupiter UK Alpha Fund (IE00BFWH6491), formerly known as Merian UK Alpha, earns an above-average rating in process, people and parent pillars. Led by Richard Buxton, the UK large-cap portfolio generates investment ideas from a combination of stock-level analysis with top-down insights. Buxton’s process has resulted in a longtime preference for the consumer discretionary sector over staples. These biases remained in place, with an overweight of 18.5 percentage points to consumer discretionary and underweight of 10.9 percentage points to consumer staples relative to the benchmark. Over to performance, the approach has typically led to outperformance in rising markets but has lagged in falling markets. Analysts note that the approach is only suitable for investors willing to tolerate variable returns in the shorter term.
Matthews Asia Dividend Fund (LU0594556309) stands out with its distinctive pursuit of firms with clear dividend policies and commitment to growing their payouts. With its benchmark agnostic approach, this strategy is seen making full use of its investment universe. For instance, holding lesser-known mid-cap names, such as Chinese autobody maker Minth Group (00425) and Australian kitchenware maker Breville Group (BRG), result in an atypical set of geographic and sector weightings. This investment process enables it to always be different enough to have a fighting chance to outperform.
If you are considering investing, please follow the link for each fund through to the data in detail.
Morningstar’s Manager Research analysts and strategists Alec Lucas, Andrew Daniels, Fatima Khizou, Germaine Share, Lena Tsymbaluk, Robby Greengold, Robert Starkey, Ronald van Genderen and Samiya Jmili are behind the research of this article.
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