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There are sharp contrasts between the value-style of the Fidelity fund and the growth-tilt of the Schroder product.
“Fidelity’s Jing Ning, has consistently applied her value-biased, benchmark-aware approach, which has proved to be effective over market cycles,” said Share.
She focuses on stocks that are disregarded by the market, but have the potential to turn around over the long run, and she successfully avoids “value-traps”.
For example, Ning initiated a position in beaten-down stock Baidu in Feb 2019, because she was constructive on the company’s core search business and cheap valuation, according to Share.
Ning starts with assessing the business cycle and tries to identify names that are currently disregarded by the market due to macroeconomic or company-specific reasons. She then determines the intrinsic value of a stock by understanding a company’s historical valuation versus its assets and earnings quality.
For those that are deemed to be trading below intrinsic value, Ning and the analyst team visit company management several times and conduct a bull/bear debate to better assess the firm’s strategy along with its fundamentals, such as barriers to entry and financial integrity.
Ning typically puts a company on her radar for six months, which allows her to fully evaluate the quality of its business model and turnaround potential before initiating a position.
“We commend Ning for sticking with the value discipline even in high growth markets such as in 2017 and 2019,” she said.
“Indeed, the portfolio’s price/earnings and price/book levels have been consistently lower than those of its benchmark MSCI China 10% capped index” she added.
However, the appointment of Ned Salter to replace Tim Orchard as Fidelity’s head of equities in April 2020 “presents uncertainties on the growth-oriented shop’s ongoing commitment to Ning’s value-tilted investment approach,” according to Share.
The outperformance of growth sectors, such as ecommerce and online gaming, during the Covid-19 pandemic this year, and the underperformance of sectors such as energy might encourage a shift in approach.
Share has few doubts about the Schroder fund’s strategy.
She has “further increased her confidence” in the quality-growth-focused investment process that has been consistently applied and proven over multiple market cycles across a range of Schroders’ Asian equity products.
After some initial screening, the analysts conduct in-depth reviews of the company and the industry that it is in, which often involves intensive company visits. At the company level, they look at sustainability of competitive advantages and execution capability; at the industry level, they look at factors such as barriers to entry and threat of substitution.
Stocks are classified into four categories according to their growth prospects, and the team favours those that can generate higher returns on investment capital than their weighted average cost of capital, or those with ROIC currently below WACC but trending toward a positive spread.
The analysts have the flexibility to use a range of valuation methods, with discounted cash flow one of the primary tools. They then grade the stocks from 1 to 4, with 1 representing a strong conviction that the stock will outperform, and Lo constructs a portfolio of between 40 and 80 holdings.
“The strategy benefits from a robust and clearly defined framework, where analysts assess a company’s growth prospects by comparing its return on invested capital and weighted average cost of capital,” said Share.
The process is “benchmark aware” so sects allocations tend not to deviate far from the fund’s reference index.
“Considered along with manager Louisa Lo’s skillful execution, the investment process has a clear competitive edge over its peers,” she added.
Source: Fund factsheets, 31 July 2020
Top 10 holdings:
|CCB||5.6%||Shandong Gold Mining||2.6%|
|ICBC||4.0%||Hua Hong Semiconductor||2.5%|
|China Overseas Land||2.9%||1.9%|
|Baidu||2.6%||China Pacific Insurance||1.9%|
|China Resources||2.6%||Shandong Weigao||1.8%|