Within this list, the analysts classify the stocks into four categories according to their growth potential, favouring those that are able to generate higher returns on investment capital than their weighted average cost of capital.
The team then grades the stocks from 1 to 4 on valuation grounds, with 1 representing a strong conviction that the stock will outperform.
Parbrook allows his analysts to use a range of valuation methods, although the discounted cashflow model remains one of the primary tools. Stocks that get a grading of 1 or 2 are selected for the fund’s portfolio.
Share noted that Parbrook limits the fund’s portfolio to 30-80 names. As Parbrook is the final decision maker, his macroeconomic outlook will have an impact on the fund’s sector and country positioning.
In contrast, the Value Partners fund – which does not adopt a benchmark reference – is concentrated in Greater China, where the firm has the strongest expertise. Outside of Greater China, the fund has a large investment (compared to the Schroders fund) in South Korean equities.
Led by Norman Ho, the Value Partners team favours stocks which trade at discounts to their intrinsic value and can offer sustainable dividend yields of 4%-5% on average.
Unlike Parbrook, Ho believes that the South Korean government’s push to increase dividend payouts through various tax measures will result in better corporate governance. Ho prefers a broader set of holdings than the Schroders team, and he usually keeps the number above 100, Share said.
Most of the fund will be invested in stable and mature large-cap companies that consistently pay dividends. However, 20%-50% of the portfolio can be invested in cyclical high-yield opportunities, often in small- or mid-caps with a higher risk profile. At times, Ho will include stocks that do not pay dividends but have good growth prospects.
“Most recently, Ho included a cosmetic company, AmorePacific, in the fund’s holdings. AmorePacific is not a dividend-paying stock, but the company is growing very quickly. Ho told us that he likes this stock because it has high penetration in duty-free shops and it is gaining ground in China,” Share said.
