Category Winner: Best Hong Kong Equity Fund – Schroder ISF Hong Kong Equity A Acc USD
Key Stats
Inception Date: 2011-03-30
Total Net Assets (Mil) (2018-2-28): 2,410.91 USD
Manager: Toby Hudson
M: Morningstar T: Toby Hudson
M: Could you highlight any major changes you made to the portfolio over the course of 2017? Were there any particular holding(s) that drove the fund’s performance for the year?
T: Outperformance in 2017 was driven by strong stock selection in internet and consumer discretionary stocks. Among the top contributors were internet names, as well as selective consumer discretionary stock in the leisure space. The fund’s allocation to China A-shares also added value on the back of strong Northbound inflows into the onshore China stock market.
Other key positive drivers were Hong Kong exporters, as well as domestic Hong Kong banks which are direct beneficiaries of the rising interesting rate environment. The Fund’s underweight position in more defensive sectors, such as utilities, also helped in what was a very strong market environment.
M: What is your outlook for 2018 specific to the markets you cover, and how are you positioned to take advantage of opportunities and/or mitigate potential risks?
T: After a very strong performance for Asian markets over the last year, valuations are more stretched, although they remain well below the peak multiples reached in past upcycles. With US interest rates rising, and QE tapering gradually after many years of very loose monetary policy, a normalization of policy rates going forward will likely present more challenges for equity markets and potentially increase volatility as investors globally adjust their expectations for the ‘new normal’. Despite some of these near term headwinds, we remain constructive on the longer term outlook for Asian equities on the back of healthy earnings momentum and solid corporate fundamentals for our preferred holdings.
We continue to look for attractive entry points to increase positions in our favoured names, while at the margin, we have been top slicing and taking profits in internet and technology stocks, when they are trading above our fair value estimates, after strong performance in the last year. We have been allocating more capital to developed market banks and insurance stocks which are beneficiaries of the higher interest rate environment.
M: Can you comment on the major risks facing financial markets, such as rising US rates and elevated asset prices? How do these risks affect your investment decisions?
T: Aside from the ever present geo-political risks stemming from North Korea and the Middle East, one major risk to global equity markets would be a sharp increase in inflation expectations that persuaded the markets the Fed was suddenly ‘behind the curve’. After almost 10 years of near zero short term interest rates, record low bond yields and massive amounts of quantitative easing, a step change in rate expectations could seriously upset the equilibrium in all asset markets and require a re-pricing of equities. We have seen some of this risk priced into bond markets in recent weeks, with US yields approaching 5 year highs following the passage of the US tax cuts, but with wage and inflation data in the US still fairly subdued, it does not yet look like the start of a more disruptive move that will seriously erode equity valuations. However, we continue to monitor this situation closely, and have been adding to sectors like banks and energy that are typical, later cycle beneficiaries of stronger growth and rising rates.
M: How is your investment team organized? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future?
T: The Schroders Asia Pacific ex-Japan Equities team was established in the 1980s and as such Schroders is one of the longest standing fund management houses in Asia. The investment team consists of 13 fund managers with an average of 21 years of investment experience. They are supported by 39 other Asia Pacific ex-Japan Equity analysts with an average of 15 years of investment experience. In addition, this regional Asian equities team has further access to additional resources in the form of our locally based domestic investment teams in Indonesia and Taiwan as well as our joint venture team in India, to gain macroeconomic and industry insights that may impact the portfolio. The regional team is led by Alex MacDougall, the Head of Asian Equity and Equity Insights who has 27 years of investment experience.
The roles of the fund managers and analysts are clearly defined and differentiated, but they work very closely together within a flat team structure. The analysts on our team are experienced investment professionals and career analysts who are focussed on generating investment ideas through stock research – making recommendations and providing Fair Values estimates for all the stocks under their coverage. This leaves the fund managers to concentrate on portfolio construction – working with analysts to build portfolios from their highest conviction bottom-up ideas that meet the specific objectives of individual Funds.
View all Morningstar Hong Kong Fund Awards 2018 articles here.
