HEAD-TO-HEAD: First State vs Schroders

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Both the First State Bridge and the Schroder Asian Asset Income belong to Morningstar’s Asia allocation category, which are traditional long-only mixed asset funds.

The primary components of these funds are Asian equity, Asian bonds and cash, according to Yew.

The main difference in terms of the two funds’ investment strategies is their asset allocation process.  The First State fund invests in two other First State funds (one equity fund and one fixed income fund), while the Schroder product has an active strategic asset allocation process.

The First State fund has 50% of its assets in the First State Asian Equity Plus Fund and the other 50% to the First State Asian Quality Bond Fund, according to Yew. The fund is periodically rebalanced to ensure that the allocation to each asset class does not exceed 60%.

“It’s always 50/50, so there’s no asset allocation process,” Yew said.

Yew noted that First State’s bridge fund is a unique offering, as Asia allocation funds do not usually marry two funds together. “Most of the other funds have a strategic allocation process.”

By comparison, the Schroder product has the flexibility to allocate 30%-70% in equities, 30%-70% in fixed income, up to 30% in cash and up to 20% in global assets.

Yew added that the Schroders fund is income-focused, which means the manager tends to invest in high-yielding securities.

Because of the differences in asset allocation, sector and country exposure for both equities and fixed income are distinctly different.

For example, in equity sectors:

Source: Morningstar

The First State fund’s equity sleeve, which is the Asian equity plus fund, has a focus on quality, which means the manager prioritises the company’s management, franchise strength and balance sheet strength in terms of investment criteria, according to Yew. A bottom-up stock-picking process is used.

“The sector allocation is really a result of the bottom-up stock selection,” he said.

The fund is benchmark-unconstrained and as a result has a huge deviation from its benchmark, which is the MSCI Asia Pacific ex-Japan Index.

Turning to the income-focused Schroder fund, the focus on yield has resulted in higher weightings than First State in sectors such as financials and telecommunications.

“Those are typically mature sectors that offer high dividend yields, which is why you see a natural gravitation toward them.”

Fixed income comparison

Another key distinction is that both funds rely on different asset classes to drive returns.

First State’s fixed income sleeve, the Asian Quality Bond Fund, follows the JPMorgan Asia Credit Investment Grade Index.

Yew said the quality bond fund is more benchmark-aware than equities and has a narrow tracking error range, which reflects its comparatively heavy weighting in investment grade credit bonds.

Because returns in investment grade credit are stable, the equities sleeve of the fund drives returns, Yew explained.

The Schroders fund fixed income portion, with a higher allocation to high yield bonds,  follows the JP Morgan Asia Credit Index.

“Schroder’s fixed income sleeve has a bigger role relative to the First State Bridge Fund in generating overall returns,” he said.

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