Fund Selector Asia asked Darius McDermott, managing director of Chelsea Financial Services and FundCalibre to consider two Asia ex-Japan strategies, the M&G (Lux) Asian A Acc fund and the Matthews Asia ex Japan Total Return Equity A Acc fund.
M&G Asian is a high-conviction fund that takes an active approach to investing across the region, according to McDermott.
“The team applies fundamental and qualitative analysis to assess and uncover investment ideas, focusing on business quality, industry trends, valuation and risk of ownership, with the final portfolio typically holds around 50-80 names.” he said.
The Matthews Asia ex Japan Total Return Equity fund was renamed in late 2023 to reflect the strong track record of generating attractive total return.
“Since the fund’s inception in 2015, it has aimed to deliver attractive total return through capital appreciation and the reinvestment of income with a portfolio of Asian growth companies that pay a steady or growing dividend,” McDermott noted. New manager Sean Taylor took over at the start of 2024.
| M&G | Matthews Asia | |
| Size | $180m | $51.5m |
| Inception | 2018 | 2015 |
| Managers | Dave Perrett, Carl Vine | In-Bok Song, Sean Taylor, Sherwood Zhang |
| Three-year cumulative return | 40.39% | 0.62% |
| Three-year annualised alpha | 6.27 | -4.60 |
| Three-year annualised volatility | 17.12% | 17.00% |
| Three-year information ratio | 1.42 | -0.70 |
| FE Crown fund rating | ***** | * |
| Morningstar rating | **** | ** |
| OCF | 1.75% | 1.80% |
Investment Approach
The M&G team covers a universe of around 500 stocks with a focus on understanding business fundamentals, industry dynamics, and potential risks of ownership.
“The goal is to anticipate how revenues, earnings, and corporate strategies react to different scenarios – enabling informed investment decisions when price-value gaps arise,” said McDermott.
Their approach is based on the principle that there are four key elements of the “investment problem: independence, conviction, fallibility and uncertainty.
“Qualitative research aims to determine if a company is a good or bad business by assessing its operations, competition, regulations, and capital needs,” sid McDermott.
Quantitative analysis is primarily applied to portfolio risk management to track factor exposures, sector concentrations and diversification. At a high level they look at how much free cashflow a business might generate in various scenarios with adjusted P/E ratios used as a proxy for this.
According to McDermott, the M&G team evaluates companies through a dual lens: “theoretical private-market value and practical public-market pricing expectations”.
They employ scenario-based “expected values” (base, downside, upside) to estimate attainable valuations under stressed conditions, rather than rigid fair-value calculations. The final portfolio has 50-80 names and has typically had a bias toward large-caps.
The Matthews Asia team believe Asian markets offer excellent long-term opportunities, but the market is volatile and idiosyncratic, according to McDermott.
The fund has an unconstrained, flexible approach that can adapt to differing market conditions.
It looks to participate in strong markets and preserve capital during times of market stress and compound this return to generate good risk-adjusted returns. This is supported by their framework, which is based on earnings and the P/E ratio of a company. The team believe P/E is where the protection is in the portfolio.
“For example, if P/E’s are low in a region with a volatile market, they are far happier to retain their position than would be the case in an area where valuations are higher and subject to a re-rating, such as India prior to the election in 2024,” said McDermott.
Best ideas come in from across the team, then fed into a framework where all ideas have a price target (risk/reward). They also have a country framework which covers valuations in each specific area. The result is a portfolio of 50-75 names that are split between defensive offerings and growth.
“The Matthews Asia portfolio has targeted the Asean region as the team believe it is a good hunting ground for total return, as there is a plethora of good companies which are not over-owned,” said McDermott.
Rates are also coming down globally and that is positive for the Asean region, where markets have been left behind since Covid, he added.
“Effectively it is about finding interesting stories with good yields,” he said.
Looking at both factsheets in more detail, the Matthews fund has a greater exposure to financials and consumer discretionary. By contrast, the M&G fund has more in industrials and materials. But the similarities between the two funds are indicated by their top individual holdings.
“Looking at both portfolios, I would argue the M&G fund is perhaps the riskier of the two,” concluded McDermott.
Fund characteristics
Country allocation:
| M&G* | weighting | Matthews Asia# | weighting |
| China | 29.9% | China/Hong Kong | 40.7% |
| India | 13.7% | India | 17.9% |
| Taiwan | 11.3% | South Korea | 9.9% |
| South Korea | 9.7% | Singapore | 6.4% |
| Australia | 8.6% | Thailand | 2.1% |
| Hong Kong | 8.5% | Macau | 1.6% |
| Thailand | 4.5% | Indonesia | 1.1% |
| Singapore | 4.3% | Vietnam | 1.0% |
Top 10 holdings:
| M&G | weighting | Matthews Asia | weighting |
| TSMC | 8.2% | Tencent | 8.1% |
| Tencent | 4.5% | TSMC | 6.0% |
| HDFC Bank | 4.0% | Alibaba | 4.3% |
| Samsung Electronics | 2.8% | Samsung Electronics | 3.5% |
| Alibaba | 2.7% | ICICI Bank | 3.0% |
| Amcor | 2.5% | BYD | 2.9% |
| AIA | 2.5% | Sea Holdings | 2.8% |
| Telekomunikasi Indonesia | 2.0% | HDFC Bank | 2.5% |
| Crystal | 2.0% | HK EX & Clearing | 2.5% |
| KE Holdings | 1.8% | CCB | 2.4% |
Manager review
“Both funds have huge resources in Asia and, in M&G’s case, globally,” said McDermott.
David Perrett is the lead manager of the M&G strategy. He joined M&G as co-head of Asian investment, bringing almost three decades of investment experience.
Before M&G, he co-founded the boutique investment firm Port Meadow Capital Management with Carl Vine (who currently is deputy manager on M&G Asian) in 2014. Prior to this, he was a managing director and senior portfolio manager at UBS, focusing on investments across the Asia Pacific region.
Sean Taylor is chief investment officer and portfolio manager at Matthews. Prior to joining the firm in October 2023, he held the same role for Apac, global head of emerging markets equity at DWS Group, based in Hong Kong.
From 2004 to 2011, he was an investment director at GAM, based in London and Dubai. From 1997 to 2004, he was at Societe Generale as head of international and emerging markets.
He is joined by several managers on the fund, including fellow co-manager Inbok Song. They are supported by co-managers from the various country funds at Matthews Asia.
A third of the team is based in Hong Kong, with the remainder in San Francisco – a move which Taylor says “allows them to cut out some of the noise in certain areas to focus on long-term trends,” according to McDermott.
Performance
Looking to performance the M&G Asian fund has produced strong returns during the past three years, with a cumulative return of 40.39% in US dollar terms, according to FE fundinfo data.
“It is hard to judge the Matthews Asia fund given the change in management at the start of 2024, however the portfolio is still very similar in structure to the M&G strategy, although changes were made to the framework to make sure the success of their country-specific funds was transferred into the regional portfolios,” said McDermott.
It generated a flat three-year cumulative return, FE fundinfo data shows.
“I would probably expect the M&G fund to produce a stronger return in both growthier and bull markets in general. The Matthews Asia fund is likely to be steadier given its strong exposure to defensive names,” said McDermott.
Discrete calendar year performance
| YTD* | 2024 | 2023 | 2022 | 2021 | 2020 | |
| M&G | 8.54% | 16.42% | 7.51% | -8.94% | 4.58% | 10.26% |
| Matthews Asia | 6.25% | 12.45% | -9.49% | -26.71% | 3.08% | 50.79% |
| Sector | 5.74% | 8.26% | 2.84% | -17.20% | -0.98% | 19.08% |
Fees
The Matthews Asia fund has an ongoing charge of 1.80%, while the M&G fund is cheaper at 1.75%, according to FE fundinfo.
Conclusion
“We actually like both of these funds and if you wanted to tap into the growthier income element in the region there is an argument for holding both,” said McDermott.
However, he believes that the Matthews fund is slightly more risk averse of the two, but not by much as they both have bottom-up strategy.
In fact, the recent change in management means that McDermott “would side with the M&G fund for now”.
“Perrett and his team bring decades of experience to investing in Asian equities, combining deep research with a disciplined, risk-aware approach,” he said. “This experience has been backed up by very impressive long-term performance.”
“Their hands-on approach and willingness to take meaningful differentiated positions sets them apart from their peers. For investors looking for exposure to the Asian market, this fund is a strong contender,” McDermott concluded.
