Report Release Date: 7 Jul 2010
Analyst: Mark Laidlaw
Morningstar Opinion
Nick Scott and the team at BGF Asian Dragon have yet to live up to their potential here.
Scott joined in early 2007 as chief investment officer for BlackRock’s Hong Kong-based Asian equities team with the remit to enhance the firm’s capabilities in this area. We’d be hard-pressed to give Scott a passing grade on this fund so far. From April 2007 to the end of June 2010 the fund produced an annualised return of -1.35% (in USD terms), 1.1 percentage points worse than the Morningstar Asia Pacific Ex-Japan Equity category average (the fund’s performance is slightly worse versus a subset of ex-Japan, ex-Australasia funds, which is more relevant to the fund’s objective). The majority of the damage was done in 2008 when a drop of almost 56% was almost 4% below the peer average. The fund fared better in 2009, but it is struggling again this year. We note that it’s also more volatile than the norm and has tended to lose more than rivals in down markets.
That performance has flowed from a relative-value-based process that looks at equities as a long-duration asset. The team’s aim is to not be distracted by typical shortterm noise/distortion that surrounds markets, especially in Asia. The team uses a multi-factor model to assist with screening for ideas. The factors used are value, quality, growth, and momentum, with greater emphasis not surprisingly placed on the first two. The lacklustre relative performance can be attributed to specific factors as opposed to any particular style leaning--the fund's exposure to small caps as liquidity evaporated in 2008 in conjunction with poor stock selection amongst battered financials hurt performance. Last year saw defensive sectors like consumer staples and telecoms disappoint, although this was more than offset by the fund’s greater bias toward cyclicals, which allowed it to beat the category average by 2.6% over the year.
Despite the underwhelming start, the fund doesn’t suffer from lack of resources. Scott leads a reasonably solid group of eight and has an able backup in Joshua Crabb, who has worked in the region for almost a decade. Scott has a wealth of experience and displays a healthy level of insight into the region. Within the team there has been some turnover but the net result is more resources rather than less. The analysts have a mix of country/sector responsibilities--for example, the basic resources specialist is also the country lead for Australia, which we believe makes sense.
We’re disappointed with BGF Asian Dragon's performance so far under Scott’s watch, but given the level of analytical resources here, we think the fund has a good shot at being at least a reasonable choice for Asia ex-Japan exposure. Scott has solid pedigree and the process in place is sound, but the onus is firmly on the manager to deliver the goods at BGF Asian Dragon. It retains its Standard rating for now.
*The above returns are in USD terms.
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