HEAD-TO-HEAD: JP Morgan AM versus Schroders

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INVESTMENT APPROACH

Both the JP Morgan and Schroders funds invest in Asia-Pacific (ex-Japan) equities, with an aim to provide investors with income, according to Morningstar’s Share.

However, their investment processes are different, particularly on how they look for yield. The JP Morgan fund has a specific yield target, while the Schroders offering is more flexible.

“The JP Morgan fund has an explicit overall portfolio yield target that is 130% of the MSCI AC Asia Pacific ex Japan Index’s,” Share explained.

Because of that, the fund has historically rotated between cyclical, such as banks, and defensive yield, such as utilities, depending on the portfolio manager’s market view.

The process begins with a screen for high dividend-yielding stocks. It also takes into consideration of the stock’s dividend sustainability and growth potential by looking at cash flows, earnings volatility and valuations over a five-year time horizon.

The resulting portfolio would typically contain 60-120 names and has historically comprised mainly value and low-beta equities.

However, Share noted that over the past year, the fund’s team introduced a new “quality-at-a-reasonable yield” allocation in the portfolio, which are quality stocks that have a sustainable earnings growth over the medium term and at least meets the benchmark’s dividend yield.

“This is to better take advantage of the sizeable emerging markets and Asia-Pacific (EMAP) team’s research output, as well as diversify the portfolio.

“We have seen the portfolio increase its exposure in the higher-quality companies. Nevertheless, the portfolio managers remain committed to the fund’s dividend focus and will continue to steer away from the high-flying stocks that pay minimal dividends,” Share said.

Quality stocks now account for around 45% of the portfolio, compared with just 25% last year. Conversely, the portfolio’s value exposure dropped to 20% from 40%.

Turning to the Schroders fund, Share said that it is more flexible in its income generation.

The fund is composed of “dividend cows”, “dividend growers” and “dividend surprises”.

Cows pay a steady dividend stream backed by stable earnings, while growers include those that currently pay low levels of dividends but has the potential of increasing its payout ratio driven by earnings growth. Surprises include those that have catalysts for rerating and increase their payout ratio beyond market expectations, according to Share.

Dividend surprises account for 10-20% of the portfolio and typically outperform when they are rerated as companies improve their capital management. Cows and growers split the rest of the portfolio, which reduces volatility across cycles as the two groups tend to outperform in bear or bull markets, respectively, Share said.

Overall, the portfolio will have around 40-70 names.

“As such, the overall portfolio yield may at times be just in line with the MSCI AC Asia Pacific ex Japan Index’s,” she said.

For example, the fund’s portfolio manager invested in dividend surprise ideas, such as Korean internet firm Naver, which yields less than 1% and Indian engineering company Larsen & Toubro, which yields less than 2%. The benchmark currently has a dividend yield of 2.32%, according to Share.

Over the past five years, the fund’s overall dividend yield averaged 4%, which is roughly in line with the benchmark.

Sector allocation:

Source: Morningstar

Geographical allocation

Source: Mornignstar

Top 10 holdings

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