HEAD-TO-HEAD: First State versus JP Morgan

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Investment approach

The First State fund’s managers draw heavily on the wider First State Stewart Asia investment team made up of 20 staffers based in Hong Kong, Singapore and Edinburgh.

The team is led by the well-regarded Martin Lau and has remained quite stable, coping with the July 2015 demerger with First State Stewart Investors, which has had no discernible impact.

“Overall, the team is the standard-bearer when it comes to Asian equities,” said Nel.

The First State Indian Subcontinent Fund, managed by Vinay Agarwal, employs a robust bottom-up, buy-and-hold approach that looks for compound growers with barriers to entry, strong balance sheets, and strong and stable returns on capital, according to Nel.

One consequence is that the fund typically avoids technology stocks, where barriers to entry are porous. In contrast, the consumer sector is especially favoured for its stable and reliable returns.

“The fund also focuses on management teams that act with integrity, are long-term-oriented, and demonstrate an ability to effectively allocate capital. The team also looks to build and maintain strong relationships with a firm’s management.

“The approach has proven itself over the long term, with the team’s unwavering commitment to it being a primary reason,” Nel said.

“The portfolio, which comprises around 40 holdings, has historically had a large exposure to small- and mid-cap stocks, which have been a good hunting ground for under followed companies that fit the team’s stringent quality requirements.”

As a result, the fund had 40% exposure to mid- and small-cap stocks, double the peer group’s 19% for the last three years.

Turning to the JP Morgan fund, perhaps the most distinctive feature is the long tenure of its managers.

“Lead manager Rukhshad Shroff and comanager Rajendra Nair seem to have been at the helm forever,” said Nel.

They have managed the strategy together since 2008, while Shroff’s involvement dates to 2003, “bringing a continuity that few can match in this space”.

Moreover, “they are passionate and knowledgeable managers who are backed by substantial resources”.

Their process has been in place for several years, emphasising buying companies that can deliver superior earnings growth over long periods of time, he said.

The team employs their in- house “strategic classification” process, which starts with a look at a company’s economics, duration of growth and governance. The companies are then classified as a premium, quality or trading company.

“Most of the portfolio consists of premium and quality companies, but there is also scope for trading ideas,” said Nel, who visited the managers two months ago.

The end result is a concentrated, conviction-based portfolio of around 30 names that has historically favoured financials (especially private-sector banks) and consumer discretionary names at the expense of the energy sector.

“The team is very long-term- oriented, so portfolio turnover tends to be around 15%,” said Nel.

“Overall, the strategy has a lot going for it, but is prone to absolute and relative volatility due to its high-conviction, concentrated nature, so investors should be patient.”

Source: FE Analytics, Morningstar (Data in US dollars, 30 August 2019)

Market Exposure 

Sector Weightings:

Source: Fund factsheets, 30 August 2019 

Top 5 holdings

Source: Fund factsheets, 30 August 2019

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