HEAD-TO-HEAD: Manulife vs Templeton

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Both funds have a bottom-up stock selection approach. The investable universe of the Manulife fund includes Australia, while that of the Templeton fund does not.

The two funds also adopt different definitions of small cap. The Manulife team includes all stocks with the market capitalisation between $100m and $3bn, and an average daily trading volume of $1m or more.

The Templeton fund adheres to the capitalization range of the MSCI AC Asia ex-Japan Small Cap Index, or the maximum of $2bn, whichever is larger.

“Both funds are growth-focused,” Share said. Manulife’s Linda Csellak, however, adds value considerations which result in an approach sometimes described as “growth at a reasonable price”.

“The team aims to identify companies with re-rating catalysts, such as brokers’ upgrades or downgrades that have not yet been priced in,” Share wrote in her 2016 fund report.

The Templeton team aims to “invest in stocks that are trading at a discount to five-year projected earnings growth”, Share said. Beyond the standard fundamental analysis, which is similar for both funds, the Templeton fund team “pays special attention to corporate governance and financial leverage, as smaller companies tend to be more vulnerable to credit crunch conditions”, she wrote.

The key difference between the two funds is the turnover, Share noted. The Templeton fund has around 100 holdings and follows a buy-and-hold approach, with a five-year investment horizon and annual turnover of 20%.

The Manulife fund has around 110 stocks and annual turnover between 200% and 300%. This very active approach adds additional capacity risk, which arises when a stock has low liquidity. In such cases, the fund’s attempt to sell the stock will drive the stock price.

“The capacity awareness is particularly important in a small cap fund,” Share said. “You want to be able to sell when you need to sell.”

Both funds face this concern. The Templeton fund is larger than the Manulife one, and so are its individual stock positions and transaction sizes. The fund managers mitigate the risk by staying away from the lower end of the market cap range in their stock selection, according to Share.

In comparison, the Manulife fund occasionally invests in small companies, down to the market cap of $100m. While this could potentially be a risky aspect of the fund, should it have to liquidate positions quickly, “we haven’t seen them have a real issue so far,” Share noted.

While neither fund implements an a priori top-down country or sector allocation approach, the Templeton fund has a 25% restriction on the deviations from the allocations in its benchmark, the MSCI AC Asia ex-Japan Small Cap Index.

The Manulife fund has no guidelines around sector and country allocation, but its individual holdings are within the +/-5% range of the MSCI AC Asia Pacific ex-Japan Small Cap Index.

Since small cap equity indices contain around 2,000 names, measures of deviation from the index, such as the active share, will necessarily be high. The Manulife fund has a 91.45% active share and the Templeton fund 95.59%.

The Manulife fund’s exposure is skewed toward developed markets, which account for 61.2% of the assets. Its largest country allocation is to Korea, 21.5%, followed by China, 20.7% and Australia, 16.9%. The top ten holdings are dominated by Korean, Chinese and Taiwanese technology companies, with the technology sector accounting for 26.6% of the portfolio, while basic materials and consumer cyclicals add around 20% each.

The Templeton fund has more exposure to emerging markets (61.6%), with India accounting for 28%, Korea for 20.7% and China for 17.2%. Its top holdings are Indian financial service firms, Chinese technology companies, and Korean consumer cyclicals.

“[The Templeton] managers come from an Indian equity research background,” noted Share. “They know the country very well and they’ve got very good corporate access.”

While this can result in skewing the country allocation, it remains within the guidelines and the stock picks are consistent with the investment process, Share added.

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