HEAD-TO-HEAD: FSSA versus Schroders

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Investment approach

“There are a lot of similarities shared by the two funds’ approaches, such as a bottom-up stock picking process and emphasis on top quality companies,” said Poole.

“They also both concentrate on mid- and small-cap stocks where there is greater likelihood of generating alpha,” he said.

“But, there are also significant differences.”

The FSSA strategy adopts a bottom-up stock selection process that aims to identify high-quality growth companies at reasonable valuations, with an emphasis on a company’s management ability.

“It is basically a ‘growth at a reasonable price’ approach,” said Poole.

The investment team, led by Martin Lau, prefer managers that act with integrity, have high governance standards, have a demonstrable track record of allocating capital effectively, and are well-aligned with minority shareholders. A company’s franchise and balance-sheet strengths are also important.

It also has an absolute return focus, low portfolio turnover, and benchmark-agnostic approach.

Lau defines risk as losing money, rather than benchmark underperformance, so country and sector exposures often differ significantly from the index, with the active share typically more than 80% relative to the MSCI Hong Kong Index.

The high conviction portfolio comprises between 35 and 80 names, and annual turnover is only about 25%.

The manager of the Schroders fund uses a stock-selection framework that looks for quality growth companies.

Analysts look at the sustainability of competitive advantages for a company, and they assess factors such as barriers to entry and threat of substitution at the industry level, according to Poole.

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,” he said.

An ESG analysis framework guides the analysts to grade each company, with an emphasis placed on governance.

Manager Toby Hudson builds a portfolio of 30 to 60 names with sector exposures generally limited to plus or minus 15% relative to the FTSE All World Hong Kong Index.

“As a result of the limits on sectors and individual stocks, the strategy has more relative return focus than the FSSA fud,” said Poole.

Both funds are underweight financial stocks and overweight industrial shares. However, the Schroders strategy is more prepared for post-Covid re-opening, while the FSSA fund is still relatively defensive with a high exposure to consumer staple stocks, according to Poole.

Fund characteristics

Sector allocation:

Source: Fund factsheets, 31 May 2021

Top 10 holdings:

Source: Fund factsheets, 31 Oct 2021

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