HEAD-TO-HEAD: Aberdeen vs Schroders

Emerging markets equities have underperformed for the last four-five years compared to both developed markets and to other asset classes. However, this year to June, EMs seemed to be turning, as the MSCI EM index recorded a 2.37% rise versus the FTSE Developed Index (1.99%).

Whether that performance will continue, marking a turning point for emerging markets after five years of pain, is now under debate. Volatility has returned to EM equities on the back of the uncertainties over the US Federal Reserve’s next action, China’s softening recovery and this month’s referendum on the UK leaving the European Union.

Against this backdrop, FSA compares two emerging market equity funds – the Aberdeen Global Emerging Markets Equity Fund and the Schroder ISF Emerging Markets Fund.

“Equities [in general] have rallied after the lows in February and risk assets have shifted into moderate consolidation mode, as they await signals about the underlying health of the global economy and the clarity over upcoming events,” Ryan Sim, head of investments for OCBC Bank Wealth Management, told FSA.

“To err on the side of caution, we are neutral on equities and at the same time, setting all our geographical allocations, including emerging markets, to neutral.”

Sim provides a comparative analysis between the two funds.

Investment Strategy

As their fund names suggest, the main investment objective is to achieve capital growth through exposure to emerging market equities and they use the MSCI Emerging Markets Index as their benchmark, Sim said.

“The Aberdeen fund’s stock-picking approach, which is focused on absolute return rather than benchmark driven, seeks out quality businesses in emerging markets with cheap valuations and holds them for the longer term,” he said.

The team assesses quality across a few dimensions — management, business strategy and prospects, financials (balance sheet strength, use of gearing) and corporate governance (transparency and commitment to shareholder value), Sim said.

Stocks that pass the quality test will then be assessed based on prices, he said.

The Aberdeen fund determines whether a company is comparatively under-priced using metrics such as price-to-earnings, price-to-cash flows, dividend yield, and net asset value. Analysts apply valuation measures that best gauge the business or industry and phase of the economic cycle, he said.

“The team compares companies across industries and regions, focusing on valuation differentials and pricing anomalies. Meetings are held each week and stocks are assigned ratings of ignore, watch, hold, buy or sell, based on the stock notes and valuation. Decisions are usually made by consensus of the senior team members. Stocks are sold when there is deterioration in quality, value or due to corporate activity,” he said.

Citing information from Morningstar, Sim said the Aberdeen fund tends to have a large-cap bias with a blend style and usually holds about 45-70 stocks.

“The Aberdeen fund’s focus on building the portfolio from the bottom up means it will at times have little resemblance with either the benchmark or the wider peer group. As a patient investor, the portfolio has tended to have some distinct skews that have been in place for a number of years.”

The Schroder fund, however, combines top-down analysis and bottom-up stock selection, he said. “The approach is intended to derive 50% of added value from country allocation and 50% from stock selection.”

Country weights of the Schroder fund are determined using a top-down proprietary quantitative model, which analyses a range of factors, such as valuation, momentum, growth, risk and interest rates.

These factors are then scored to arrive at rankings and recommended weightings for all the countries in the universe, he said.

Schroders’ company valuation model and discounted cash flow analysis are used to establish fair value, and the teams assign ratings of one to four for each stock, Sim said.

“The portfolio managers tend to buy stocks rated at one or two, but three- and four-rated stocks may also be held to manage risk.

“There is also a stop-loss rule in the process. A stock is sold or reviewed if it underperforms its local market by 15%.”

The portfolio of the Schroder fund is relatively diversified and consists of 90-130 names, he said.

“The fund usually displays a blend style and has averaged above 90% in large caps. The fund’s tracking error is typically within 5% relative to the MSCI Emerging Market Index, indicating the returns of the fund should not stray far from the returns of the index.

“Country weights change depending on the output of the quantitative model.”

Country Breakdown

Source: Funds’ factsheet as of end-April; Morningstar

Sector Breakdown 

 Source: Funds’ factsheet as of end-April; Morningstar

“Our observation is the lower exposure of the Aberdeen fund to North Asia and higher exposure to India relative to the contrary from the Schroder fund, which somewhat highlights the contrasting views the two investment teams have towards these two emerging geographies,” Sim said.