The Hong Kong Mutual International Equity sector is comprised of 140 funds and is highly competitive with 10 FE designated “alpha managers” — managers who have consistently outperformed their peers over multiple time periods.
How does one of those funds compare to the sector average?
FSA asked Luke Ng, senior VP of research at FE Advisory Asia, to provide a comparative analysis of the Invesco Global Structured Equity Fund with peer averages in the sector.
Investment Strategy
Invesco Global Structured Equity is domiciled in Luxembourg as a mutual fund and the share class for Hong Kong was launched in December 2006.
“The MSCI World USD Hedged is named as the benchmark of the fund, however, it is not a benchmark-centric portfolio. Therefore, the composition of the fund can differ from the index and many of its peers.”
Unlike most of the active managers among the HKM Equity – International sector, the fund adopts a quantitative strategy to manage the portfolio. It aims to translate fundamental and behavioural finance insights of the team and builds the portfolio in a systematic and structured process.
“With a focus on bottom-up stock selection, the team forecasts stock returns by quantifying their insights from four major aspects: earning expectation, market sentiment, management quality and value,” Ng said.
In the next stage, a proprietary risk model is used to assess a variety of risk factors at the securities level. There are also pre-set portfolio constraints in place to guide the portfolio construction process, including caps weightings on individual stocks (2%), sectors (25%), countries (40%) and regions (50%).
By combining the return and risk forecasts, portfolio guidelines and constraints, and together with their forecast in transaction costs, a portfolio optimisation process is used to build the portfolio considering the aforementioned elements.
“The optimisation process ends up with a diversified portfolio that tends to have lower volatility than the benchmark, as well as the peers’ average.
“By focusing in a quantitative based method, the team never undertakes company visits or management interviews to assist the stock selection process. While this is considered as a key difference with most active managers, the fund also picks stocks among the MSCI World universe, meaning that the fund is not investing into emerging markets.”
Luke Ng, senior VP of research at FE Advisory Asia
While the composition of the fund can be very different from its benchmark due to the unconstrained approach, other differences can also be seen against the peer average, Ng said.
“By maintaining individual stock exposure to 2% or below, the fund tends to have less stock-specific risk than peers. This compares to the average top holding of funds in the Hong Kong Mutual Equity – International sector, which is 3.65%.”
The constraint on individual stock exposure also implies a lower concentration risk as the top 10 weightings will typically stay below 20%. By comparison, the average top 10 weighting among peers in the sector is around 24%.
Another key difference between the fund and its peers is country allocation. While US Equities account for around 60% of the MSCI World composition, the 40% cap weightings for individual countries of the fund means that it tends to have lower US exposure relative to peers, Ng added.
“Worthwhile to note, turnover of the Invesco quantitative strategies is typically at 7-10% of the portfolio on a monthly basis. That means the average holding horizon of the fund is around one year, and that tends to be shorter than many of its peers in the sector.”
Performance
Invesco Global Structured Equity is given a 4 crown rating by FE, indicating the fund has delivered strong risk-adjusted returns in terms of alpha, volatility and consistency over the last three years. As of September 2016, the fund outperformed the peer average and benchmark in three- and five-year periods and at the same time maintained at a lower level of volatility over both periods.
“The track record suggest that the fund has been doing well by using its optimisation process to control volatility risk and at the same time posting long-term capital growth opportunities for investors.”
Cumulative performance of the fund vs sector
| 1 yr | 3 yrs | 5 yrs | |
| Fund | -3.75% | 20.49% | 58.32% |
| Sector | 0.20% | 5.18% | 33.36% |
| Relative to sector | -3.94% | 14.56% | 18.71% |
Source: FE
The fund vs the sector over the trailing three years:
