Posted inHead To Head

Equity income head to head

Head-to-Head puts equity income strategies from First State Investments and Schroder Investment Management against each other.
Fund houses have been seeing significant investor demand for income products the last few years and many expect the hunt for yield to continue in the low interest rate world.
Recent independent surveys by fund houses have also showed investors’ increasing interest in dividend-yielding products.
This is also one of the themes for Fund Selector Asia’s forums coming up in February.
Against this backdrop, we take a look at two well-known funds that have been in existence for more than a decade: the First State Asian Equity Plus Fund and the Schroder International Selection Fund Asian Equity Yield.
The Ireland-domiciled First State fund was incepted in July 2003 and had assets under management worth $2.5bn on 31 December.
The Luxembourg-domiciled Schroders vehicle was launched a year later in June 2004 and had $2.4bn in assets under management.
Most market analysts expect market volatility to  increase. Which of these two funds will be able to limit downside risk?
Germaine Share, manager and research analyst with Morningstar Investment Management Asia, provides a comparative analysis. 

Investment strategy review

Morningstar has a positive view on the First State investment process, which takes into consideration the company’s management history, track record, corporate governance, and other fundamental factors for making investments.
“Even though First State does invest in above average dividend-paying firms, their main focus is to find quality companies that deliver sustainable growth. 
“They will not sacrifice quality for growth. This may result in the overall portfolio dividend not being that much higher than the benchmark.”
As per the December-end fact sheet, the First State fund had invested in a total of 64 holdings in its portfolio with the top 10 companies accounting for nearly 30% of its assets.
The top five holdings are Cheung Kong Holdings, Taiwan Semiconductor, OCBC, Dabur India and Link REIT.
In regards to the Schroders fund’s investment process, portfolio manager King Fuei Lee classifies stocks into three buckets, Share said.
“These three buckets are: ‘Dividend Cows’ which means stocks that provide a steady dividend stream; ‘Dividend Growers’ – those with a rising dividend stream driven by earnings growth; and ‘Dividend Surprises’ – those with a rising dividend stream driven by a catalyst that would improve payout ratio.”
Share added that the stocks that constitute “Dividend Surprises” are limited to 10% of the portfolio at most, while the other two buckets are maintained largely at equal weights to minimize volatility across the full market cycle.
The Schroders fund has a total of 56 companies in its portfolio and its top 10 holdings also account for nearly 30% of the assets.
The five largest holdings are HKT Trust, Jardine Strategic, Commonwealth Bank of Australia, Taiwan Semiconductor and Hutchison Whampoa.
In terms of sector orientation, the First State portfolio had the largest exposure to financial companies, with a 27.2% weighting, though the fund is underweight compared to its benchmark index, the MSCI AC Asia Pacific ex-Japan (38.1%). 
The fund is underweight on information technology companies (a 14.4% weighting in the portfolio compared to the benchmark’s 16.7% weighting).
An overweight sector is consumer staples, with a 19.1% weighting compared to a 5.9% representation in the index. 
The overall portfolio is skewed in favor of Indian companies, which account for 21.5% of the portfolio, followed by Taiwan (13.5%) and Hong Kong (12.1%) companies.
By comparison, the Schroders fund has about 35.3% allocation toward financial companies compared to 39.5% in the benchmark index. It is also underweight technology companies (11.9% compared to 16.3%).
However, the fund is overweight industrials (13% compared to 8%).
In terms of country allocation, the Schroders fund has its largest allocation toward Australia, Hong Kong and Taiwan companies with 28.7%, 28.5% and 9.9% weighting, respectively. 
Worthwhile to note is that the Schroders fund had just a 2.6% allocation to India.

Performance review

“The performance of both funds has been great. Both are ranked very well in the Asia Pacific ex-Japan peer group comparison,” Share said.
Morningstar has a gold rating on the First State fund and a bronze on the Schroders fund. 
According to FE Analytics, the First State fund posted 26.4%, 13.6%, 12.4% and 13.6% returns over one-, three-, five- and ten-year horizons (until 28 January). On the other hand, the Schroders product recorded 13.3%, 9.1%, 10.3% and 8.2% returns, respectively, during the same periods. 
In terms of calendar year performance, the First State fund registered a 13.7% return in 2014 compared to the 7.6% delivered by the Schroders fund. During the taper tantrum of 2013, the First State vehicle gained 4.3% whereas the Schroders fund lost by 2.8%. 
“In general, the First State fund is very downside resilient. It outperforms during bear markets, which has to do with their investment strategy. They have a very high quality focus, which works well under distressed market conditions.”
“If you look relative to the category and to the benchmark, then the Schroders fund is also downside resilient.”
“There are times when the (‘dividend growers’ and ‘dividend surprises’ stocks) may detract from the performance in the short-term, like in 2013 when the fund underperformed. But it is also important to note that you need to give some time for the strategy to pan out.”
In 2012, the First State fund recorded a 24.7% return compared to the 31.2% registered by the Schroders fund. Looking at 2011 performance, the First State fund posted a negative 10.2% return whereas the Schroders fund gave a negative 9.3% return.
“If there is a momentum-driven market rally, then it is likely that the First State fund would underperform. But, the First State fund is being very consistent in delivering outperformance.”

Manager Review

Share said Morningstar has a positive score for managers of both funds.
Morningstar evaluates funds based on five key pillars–process, performance, people, parent and price.
Martin Lau, director of Greater China Equities has been managing the First State fund since its inception in July 2003. Richard Jones joined Lau as a co-manager for the fund in January 2012.
“Martin Lau is a star manager. He has close to two decades of investment experience and he has been managing this fund for over a decade.”
Lau joined the First State Stewart team in April 2002. Jones is a senior analyst/portfolio manager and joined First State Stewart in January 2010.
Lau also manages other products and two of them, the First State Greater China Growth and  the First State Hong Kong Growth are given a Gold rating by Morningstar, Share said.
Looking at the Schroders fund, King Fuei Lee has been managing the fund since its inception in June 2004. Lee is the fund manager for Asian equities and the lead fund manager for developed Asia Pacific equity mandates. He joined Schroders as a graduate trainee in 1999.
Share noted that Lee’s entire investment career has been with Schroders. 
“He also manages another fund, which is the Schroder Asian Total Return Fund. The performance there has also been very impressive,” she added.
“In our opinion, both are very impressive managers and both are supported by sizeable analyst teams.”


The ongoing charges or the total expense ratio for the First State fund is 1.58%, which compares with the category median of 1.79%, Share said. The ongoing charge for the Schroders fund is 1.93%.
“Obviously, the First State fund is cheaper and has a positive rating for the price pillar [one of the Morningstar parameters for evaluating funds]. This partly is the reason why Schroders has a bronze rating.”


Share said she preferred the First State fund because of its strong investment process, impressive manager track record and analyst team along with its favourable pricing.
“We also have a very high conviction in Martin Lau. He has been consistent across all his products.
“Both funds are long-term performance driven and downside resilient, but [this is valid] even more so for the First State fund.”

Part of the Mark Allen Group.