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HEAD-TO-HEAD: Schroders versus UBS AM

FSA compares two China equity products: The Schroder ISF China Opportunities Fund and the UBS (Lux) Equity Fund – China Opportunity Fund.
by Francis Nikolai Acosta

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INVESTMENT PROCESS

The Schroders and UBS funds have some similarities, with both of them investing a majority of their assets in offshore China equities and having a bias towards large-cap names, according to Liu.

Market cap Schroders UBS AM
Giant 44.75 64.91
Large 38.94 13.48
Mid 11.07 6.34
Small 2.36 0.45
Micro 0.2 0.23
Source: Morningstar Direct

In terms of style, both funds also have a preference for growth stocks.

“That is no surprise because the main drivers of the stock markets in China are really growth stocks,” Liu said.

However, the investment processes of both products are different.

The Schroders fund focuses on high quality companies, in which its fund manager, Louisa Lo, looks at competitive advantages, barriers to entry and threats of substitutions, according to Liu.

“The fund manager favours companies that can generate high returns and that can efficiently use capital,” she said. For example, Lo favours either companies having a return on invested capital (ROIC) greater than their average cost of capital or those that have improving ROICs.

Turning to the UBS AM fund, Liu said that the strategy’s lead manager, Bin Shi, first identifies which industries or sectors he believes will benefit China’s structural growth. He then invests in “industry winners” that have good fundamentals and attractive valuations.

But what makes the UBS AM fund different from most China equity funds is its cash policy, where cash positions can go up to a maximum of 20%. The cash policy is used for downside protection during market selloffs, Liu explained.

“I don’t see a lot of funds doing this. Some may have a similar policy, but they wouldn’t use it, as they think they might miss opportunities in the market,” Liu said.

The differences in their investment processes are reflected in their sector allocations and top 10 holdings. For example, while consumer discretionary account for the largest sector allocation in both funds, the Schroders fund has a huge allocation to materials at 11.9%, while the sector only accounts for 0.75% in the UBS AM fund, according to their fund factsheets.

Sector allocation

Schroders UBS AM
Sector % Sector %
Consumer discretionary 34.2 Consumer discretionary 24.79
Materials 11.9 Financial services 18.15
Financials 11.6 Communication services 14.24
Communication services 11.2 Consumer staples 11.58
Information technology 9.6 Healthcare 6.52
Industrials 7.5 Real estate 5.13
Healthcare 3.3 Industrials 1.93
Energy 3.1 Information technology 1.73
Consumer staples 3 Materials 0.75
Liquid assets 2.3 Utilities 0.62
Real estate 1.2 Energy –
Derivatives 0.7 Others 14.56
Other 0.6
Source: Fund factsheets. As of end-February 2021. 

Top 10 holdings

Schroders UBS AM
Company % Company %
Alibaba Group 9.2 Tencent 9.67
Tencent 7.6 TAL Education 9.58
Meituan 3.3 Alibaba 9.24
China Petroleum & Chemical 3.1 Ping An Insurance 5.6
China Pacific Insurance 3 Kweichow Moutai 5.12
China Life Insurance 2.9 Netease 4.48
Jiangxi Copper 2.6 Yihai International 3.34
Sands China 2.3 China Merchants Bank 3.28
PRADA SpA 2.3 Hong Kong Exchanges & Clearing 3.03
Great Wall Motor 2.1 Ping An Bank 2.32
Top 10 holdings % 38.4 Top 10 holdings % 55.66
Source: Fund factsheets. As of end-February 2021.

 

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