HEAD-TO-HEAD: JP Morgan versus Matthews Asia

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INVESTMENT APPROACH

The JP Morgan Asia Growth Fund is a high conviction and concentrated fund, primarily focused on finding high quality, growing companies, according to McDermott.

“The portfolio is built using JP Morgan’s extensive emerging market and Asian analyst resources located across the globe,” he said.

This expertise comprises 38 research analysts and 27 country specialists, plus four macro and quant analysts. The department was reorganised in 2015, at the same time as the fund Joanna Kwok and Mark Davids took over the fund.

Analysts classify stocks on their coverage lists as premium, quality, or trading, according to JP Morgan’s strategic classification framework, which is based on a 98-point questionnaire. The managers allocate about 75% of portfolio assets to premium and quality names, which operate in attractive industries and possess strong balance sheets, good management teams, and solid growth prospects. The balance is allocated to trading names, which may have attractive valuations but face greater external or operational risks.

“The checklist also highlights red flags,” said McDermott.

“The more there are, the more reward they need from a company. This helps the managers identify the risks of each stock and see whether there is an acceptable level of reward,” he said.

“Plenty of company meetings also take place – all in the mother tongue of the board to ensure nothing is ‘lost in translation’. From this work, Kwok and Davids build their portfolio, with a significant bulk allocated to the top 10 names,” according to McDermott.

“The quality focus has meant the fund has historically had a focus on growth stocks and away from value names, although financial stocks have been a typical overweight due to the demand for banking services from the region’s growing middle classes,” he said.

Sector overweights include communication services, financials and healthcare, according to the fund factsheet.

“Overall, the growth tilt means the fund is expected to do well in a growth environment but not in value rallies,” said McDermott.

Turning to the Matthews Pacific Tiger Fund, McDermott pointed out that although it is also high-conviction, there is a greater allocation to mid- and small-cap stocks.

“The Matthews fund is also high conviction with a similar number of holdings of between 50 and 60,” he said.

“But is run from San Francisco – deliberately to separate the team from market noise, and it has an emphasis on domestically or regionally-oriented companies that stand to benefit from the long-term evolution and growth of the Asian consumer,” he added.

“Although the fund can invest across all market capitalisations, it tends to favour mid- and small-cap companies, which are under-represented in the indices relative to their mega-cap peers,” said McDermott.

The fund has a significant country overweight allocation to India, and sector overweights to information technology and consumer staples, according to its factsheet.

Fundamental analysis and due diligence are the most important parts of the fund’s investment process.

“The manager looks for quality businesses with the ability to survive and generate sustainable earnings and cash flow through economic and market cycles. Valuation is important at the point of the initial purchase, although other factors such as corporate governance and the quality of the business are considered more important,” said McDermott.

“However, given the fund’s long-term approach and bias to domestic consumers, it is liable to struggle during export-led rallies,” he said.

Fund characteristics

Sector allocation:

Source: Factsheets, *30 September 2020, **31 October 2020

Country allocation:

Source: Factsheets, *30 September 2020, **31 October 2020

Top 10 holdings:

Source: Factsheets, *30 September 2020, **31 October 2020

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