Sector allocation comparison
| Sector | Macquarie Asia New Stars | Schroder ISF Asian Small Caps |
| Defensive | 24.8 | 20.6 |
| Consumer defensive | 6.9 | 11.9 |
| Healthcare | 12.8 | 8.7 |
| Utilities | 5.1 | 0 |
| Sensitive | 26 | 46.2 |
| Communication serv. | 4.7 | 4.7 |
| Energy | 1.5 | 0 |
| Industrials | 6.8 | 28.7 |
| Technology | 13 | 12.8 |
| Cyclical | 49.2 | 33.3 |
| Basic materials | 10 | 0.2 |
| Consumer cyclical | 24.5 | 28.5 |
| Financial services | 11.7 | 4.5 |
| Real estate | 2.9 | 0 |
Source: Morningstar. Macquarie data from December 2014. Schroder data from November 2015.
Fund performance
Of the two funds, Rathband has a relatively shorter track record. He has been managing the Schroder fund since 2012. Both Le Cornu and Bugg have been managing the Macquarie fund since its inception in 2009.
Laidlaw said that while both funds have outperformed the index, the Macquarie fund has more consistently outperformed the Schroder fund.
In 2012, the Schroder fund gained 30.3%, outperforming the Macquarie fund, which gained 26.6%. However, in 2013, 2014, and 2015 the Macquarie fund gained 21.8%, 11.9% and 1.7% respectively, outperforming the Schroder fund which gained 18.8%, 7.7% and 0.9% respectively.
Calendar year performance comparison
Source: FE. YTD data to 25 January 2016.
“Both funds have actually on a relative basis done quite well. It’s just that the Macquarie fund has done a little bit better when you compare the two on a head-to-head basis,” said Laidlaw.
Laidlaw said that both funds are likely to underperform when there is a market rally that is not driven by fundamentals. Also, as both managers tend to avoid investing in state-owned enterprises, both funds would also underperform if SOEs did well.
Given that both funds invest in the small to mid cap space, returns can be volatile, however. The Macquarie fund tumbled by 61.7% in 2008, and in 2011, fell by a fifth. Similarly, the Schroder fund fell by 59.7% in 2008 and 28.6% in 2011.
On a cumulative three-year basis, the Macquarie product has slightly outperfomed the Schroder vehicle, according to FE data:
Manager review
Bugg and Le Cornu, co-managers of the Macquarie fund, have a long track record running the fund and have helmed a stable team that has seen few departures, Laidlaw said. Both managers are experienced small cap investors, though their backgrounds were initially in Australian equities.
Bugg has 20 years of investment experience and was regarded for his Australian small cap capabilities. Le Cornu has 14 years of investment experience, and previously managed an Australian small cap fund, before joining Macquarie in 2008.
Turning to the Schroder fund, Paul Rathband, who has 24 years of investment experience, joined Schroders in August 2011. Laidlaw said he has reinvigorated the fund, delivering strong returns since March 2012 when he took over from the previous portfolio manager Piang Sze Chua, who left the firm.
Prior to joining Schroders in Singapore in 2011, he spent the majority of his career on the sell-side. He joined from RBS Asia Securities, where he was responsible for the firm’s Asia ex-Japan research sales and Asean equity business.
Fee review
The Schroder fund charges a flat fee of 1.96%, which Laidlaw said is in line with the median. By comparison, the Macquarie fund had a total cost of 2.18% in 2014, making it more expensive than the category median.
The Macquarie fund charges a performance fee of 10% on returns over a 5%-per-year hurdle, subject to a high-water mark. Laidlaw said that if the fund performs strongly, the performance fee could potentially get expensive. He added that while he is comfortable with a performance fee, it should have a meaningful hurdle and should be over a benchmark.
“If you have a performance hurdle over a recognized index or an index plus a certain amount, then it’s more of a level playing field as opposed to having an arbitrary number,” said Laidlaw.
Conclusion
Morningstar has given a Bronze rating to both funds. Laidlaw said that both funds are well placed to capture the growth from the small cap space and he is equally comfortable with both managers.
He added that a decision between the two funds might come down to investors’ individual preferences and how each fund might blend with an investor’s broader Asia large cap portfolio.
“If you’re a strong believer in the structural growth and domestic demand story, then the preference might be for the Macquarie fund,” said Laidlaw.
From a fee perspective, though, the Schroder fund is cheaper. “If you like the consistent performance and like the idea of having a flat fee as opposed to a performance-based fee, then the Schroder fund might be more suitable,” he added.
