HEAD-TO-HEAD: Aberdeen vs Matthews Asia

123456

Investment Strategy

“The Aberdeen team see themselves as a stakeholder in the company rather than an investor,” said Ng. “They have held some of the holdings in the portfolio for more than ten years.” The fund had 34 positions at the end of May, according to its fact sheet.

In order to select companies to invest in for the long term, the Aberdeen team adopts strictly a bottom-up stock selection approach. While its performance is benchmarked to the MSCI India Index, the portfolio is benchmark-agnostic.

“They have a strong focus on quality,” Ng said. “They look at the quality of the management team, the company’s balance sheet, the sustainability of its earnings growth. They want to build a relationship with the management of the company and a level of trust in it before they invest.”

Due to the size and the high-conviction approach, the fund tends to invest in large-cap companies. But it has a bias toward private companies and rarely holds state-owned enterprises (SOEs), Ng said. This bias has resulted in a higher average valuation compared to that of the benchmark, as private companies tend to have better fundamentals and trade on higher price-to-earnings multiples than SOEs.

“Even though the fund has companies with higher valuations, the team believes they have much better quality investments and that’s why they continue [with this approach],” Ng said.

The Matthews Asia fund, by comparison, uses a different benchmark, the S&P BSE 100 Index. The main difference between it and the MSCI India Index is that the S&P BSE 100 has a higher weighting to the financial sector, around 34%, compared to MSCI India’s 23%. Although neither funds follow the benchmark closely, the Matthews Asia fund held around 36% of its investments in financials at the end of April, while the Aberdeen fund held only 22%.

The Matthews Asia team focuses on quality and valuation in building its portfolio, which is slightly less concentrated than the Aberdeen fund’s. It had 55 holdings at the end of May.

“They are more willing to invest in small- and mid-cap companies,” Ng said. “The valuations of the holdings in the Matthews Asia fund are lower than Aberdeen’s.”

The two teams’ analysis of quality and valuation differs slightly, Ng noted. While the Aberdeen team looks at P/E multiples and uses a discounted cash flow model to calculate the intrinsic value of the company, the Matthews Asia team puts emphasis on return on invested  capital, which should be significantly higher than the cost of capital.

123456