HEAD-TO-HEAD: Allianz versus FSSA

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Investment approach

The Allianz fund invests solely in the Chinese A-share market. The managers focus on diligent fundamental research and target sustainable growth businesses at reasonable valuations, according to McDermott. The target is to return 3-5% per annum over the index, over a market cycle and gross of fees.

Each analyst covers 30-50 stocks in depth with a lighter monitoring of around another 100 names. “The approach is to be ‘narrow and deep’ with research focused on parts of the market which are ignored by others. Grassroots research is a separate entity that conducts investigative research at a local level.”

“This allows the team to get information faster and more accurately than the market, and the team typically commissions 45 grassroot research reports a year,” said McDermott.

The managers exclude stocks below $1bn market cap to remove companies with low liquidity, so in practice there is a bias to large caps. The fund’s philosophy is a Garp (growth at a reasonable price). approach.

There are three main considerations. First, is the company growing faster than the market and is the growth sustainable? The fund looks to avoid firms that are exposed to potential future technological or regulatory threats.

Second, does the company have a strong balance sheet and is it well capitalised? The managers look to see if its cash flow has a favourable outlook and if the accounts are transparent, as well as assessing the culture of the company and management.

Finally, they assess valuation using a variety of different metrics depending on the industry. However, the primary metric is the Peg ratio (price earnings to growth). The preference is to invest in companies with a Peg below one.

“As there are a lot of retail investors in the A-share market, who tend to have a very short-term outlook and a bias to small cap and momentum stocks, this part of the market can be very volatile but also very rewarding,” said McDermott.

In contrast, the managers of the FSSA fund look for well-managed businesses with good corporate governance across Hong Kong, China and Taiwan, according to McDermott. “They have an absolute return mindset that leads them to thoroughly research the market and apply very strict conditions to ensure only stocks with the best possible chance of achieving their objective make it into the portfolio.”

The fund can and does invest not only in Chinese H-shares, but also in A-shares (currently about 15.6%), as well as in equities in Taiwan (32.8%) and Hong Kong (14.9%).

The style is very much bottom-up, searching for quality companies with sensible management and sustainable and predictable growth. “The application of uncompromising valuation discipline ensures the team does not buy overvalued stocks, regardless of their earnings outlook,” said McDermott.

Fund characteristics

Sector allocation:

Source: Fund factsheets, *31 Dec 2021, **30 Nov 2021

Top 10 holdings:

Source: Fund factsheets, *31 Dec 2021, **30 Nov 2021

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