HEAD-TO-HEAD: Stewart Investors versus Templeton

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INVESTMENT APPROACH

The two funds have very different strategies, according to Daniels.

The managers of the Stewart fund seek quality stocks that can deliver sustainable and predictable growth through its pricing power, franchise strength, and limited regulatory oversight, said Daniels

Management stewardship is especially important: they require management teams that act with integrity, are long-term oriented, and demonstrate an ability to manage risk effectively.

The lead manager, Tom Prew (like his predecessor Ashish Swarup) is “very value focused and insists on companies with strong corporate governance”, said Daniels.

These concerns account for the almost zero exposure of the fund to China stocks, including to the tech giants Alibaba and Tencent, although Prew and his team conduct a great deal of research on them and so allocations are possible in the future.

“While there are several China consumer-related names on the team’s quality list, the managers doubt the franchise durability and management integrity of many tech-related firms,” said Daniels.

The investment universe is shaped primarily through frequent management meetings, with the managers considering how senior executives have conducted themselves throughout their careers. Ultimately, they form a list of about 350 firms from which the 40-60 stock portfolio is built, oftentimes using compelling valuations as the catalyst to initiate positions.

The strategy is benchmark-agnostic, so country and sector exposures differ substantially from the MSCI Emerging Markets Index.

Although the “Leaders” mandate means that holdings will have market caps above $1bn, the portfolio has consistently had a smaller-cap tilt compared with the index. For instance, its average market cap of $11.7bn as of December 2019 was well below the index’s $35.8bn average.

Concurrent with management’s long-term mindset, portfolio turnover tends to be between 20% and 40%.

Overall, “the approach is well-codified, robust, and differentiated,” said Daniels.

Since Swarup’s September 2019 departure, new lead manager Prew made progress on aligning the Ireland-, UK-, and Singapore-domiciled vehicles with the Australian domiciled vehicle, the last of which Prew had already been running.

This resulted in 11 new holdings, seven disposals, and several position sizing adjustments in 2019’s fourth quarter.

Prew tends to have lower weightings in turnaround plays compared with his predecessors, and reined in some bets, including 2019 laggards Tata Power and Dairy Farm International.

Indeed, the portfolio maintained its longstanding overweighting in consumer staples and India; conversely, the severe underweighting in China remained, with just a 1% stake versus the index’s 34%.

Turning to the Templeton fund, the managers, Chetan Sehgal, and recent arrival Andrew Ness, look for stocks that appear cheap relative to their five-year projected earnings growth, according to Daniels.

“It is a very traditional emerging markets strategy which, although a reasonable offering, lacks a distinctive edge,” he said.

Quantitative screens on factors such as price/earnings and price/book are used to narrow down an investment universe of approximately 25,000 stocks. Analysts then conduct fundamental research on prospective holding — assessing competitive positioning, management quality, and ownership structure — before conducting valuation analysis.

Following a peer review process, the managers use the recommendations as a source of ideas to construct the ultimate portfolio of 70-90 stocks, according to Daniels.

Management invests with a long-term mindset, so annual portfolio turnover trends lower than 20%.

The objective is to have stock selection drive most of the performance, so sector and country allocations typically stay within 10 percentage points of the MSCI Emerging Markets Index, while individual active bets are subject to 5-percentage-point maximums, with active share ranging between 60% and 70% in recent years, according to Daniels.

The portfolio tends to closely match the index, with heavy weightings in the leading tech growth stocks – Samsung Electronics, Taiwan Semiconductor Manufacturing, Alibaba and multiple affiliate companies of Tencent, as well as the main stock.

“Overall, the approach is reasonable, but it’s not clear what discernible edge it offers in a competitive peer group,” said Daniels.

Fund characteristics

Country allocation:

Source: Fund factsheets, *30 November 2020, **31 December 2020

 Sector allocation: 

Source: Fund factsheets, *30 November 2020, **31 December 2020 

Top 10 holdings: 

Source: Fund factsheets, *30 November 2020, **31 December 2020

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