HEAD-TO-HEAD: Allianz Global Investors vs Kempen International Funds

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The investment strategy of both funds is based on bottom-up stock selection, with a quality approach.

“Both funds share the same quality approach,” Ronald Van Genderen, fund analyst at Morningstar told FSA, noting that there were differences in how strictly the two funds adhere to it.

“The Allianz fund has a pure quality approach,” he said. It invests in high-growth, high-quality stocks. The fund’s managers look for companies with a strong balance sheet, a competitive advantage and high market share in businesses where there are barriers to entry.

The Kempen fund, by comparison, invests 60% of its portfolio in high-quality companies, paying attention to high return on capital, strong cash flow and long-term prospects. The remaining 40% can be invested in “special situation” companies. They can be companies undergoing organisational changes, but showing the potential to become high-quality companies.

“Such leeway around the quality approach can be helpful in periods when quality is out of favour,” Van Genderen said.

Both funds start from the same universe of European developed market stocks. However, they differ in their definition of a small cap. The Allianz fund looks at companies with capitalisation between €200m and €4bn, while the Kempen fund invests in those between €250m and €5bn.

The Allianz fund can deviate from these criteria by investing up to 20% of its portfolio in stocks outside the capitalisation range or those from Eastern Europe. Despite the leeway, the fund has not been investing in Eastern European stocks recently, according to Van Genderen.

The funds also differ in the level of diversification. The Allianz fund held 96 stocks at the end of September and its usual range is 80-110 names. Its top 10 holdings constituted 18% of the portfolio, less than the usual for the category, he said.

The Kempen fund is more concentrated, with 33 holdings at the end of September, and the usual range of 30-50 names. Its top 10 holdings accounted for around 40% of the assets.

Each fund has the highest country exposure to the UK — Allianz at 21% and Kempen at 28%. Other countries in the top five for both funds are Germany and Switzerland.

Another country exposure difference is that the Allianz fund has a higher allocation to Sweden and the Netherlands, while the Kempen fund invests more in Italy and Spain.

Since the universe of small cap stocks is large, both funds have a high active share around 80%.

In 2016, Kempen incorporated ESG (environmental, social and corporate governance) criteria into the investment process of its European Small-Cap Fund. Portfolio candidates are evaluated by ESG analysts and those that fail to meet criteria on all three ESG pillars are excluded. Those that show commitment to ESG, even if its implementation is in progress, are approved.

The implementation of ESG criteria in 2016 did not have an immediate effect on the fund’s portfolio, according to Van Genderen. In part because many stocks already fulfilled the ESG criteria and in part because the fund has a mandate to engage with the companies to help them improve their ESG scores. If a company makes no progress after two years, the fund will sell its holding and it is excluded from the investable universe.

“Like most asset managers these days, [the managers of the Allianz fund] also look at ESG, but its integration in the process is not as pronounced as it is at Kempen,” Van Genderen said. The main difference is in the Kempen fund’s additional step in which a stock has to be approved on ESG criteria in order to be included in the investable universe.

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