Schroders manager uses awareness of relative value to negotiate extreme market moves
Launched in November 2007, Matthew Dobbs’ Schroder Asian Alpha Plus is the top performer out of 75 vehicles in the IMA Asia Pacific excluding Japan sector over one year to 15 February, up 76.6% against an average increase of 52.8%, according to Morningstar.
The fund aims to maximise capital growth by investing in Asia ex Japan companies. Fixed-interest securities and Reits may be included in the portfolio. The fund may also invest in collective investment schemes, cash, deposits, derivatives, warrants and money-market instruments.
What is your investment style?
It is an active fundamental equity fund. My style is towards the quality end of companies, seeking out areas such as the mispricing of growth. Good corporate governance and trustworthy management are a necessary condition to any investment, particularly in Asia.
The Asian Alpha Plus fund is fairly concentrated so a disciplined portfolio construction is important. Any new stock in means an old stock goes out. So at all times I am thinking about optimising the effectiveness of the capital pot in the fund.
It is fairly multi-cap – if I find value in the smaller mid area I will go there within a controlled discipline. I find it quite difficult to put myself in a convenient box, because what the past few years have shown is it is really important in Asia to have flexibility and an awareness of relative value, because you do get extreme moves in some markets or sectors.
You have to have the discipline to say ‘this has gone far enough, I can see better value somewhere else’ and flexibility in the style used.
What have been the key drivers of performance?
It has been a lot of different things. There has not been any big sector or country positioning. At the back end of 2008 through to early 2009, I did consciously move money into Chinese domestic stocks, some of the residential property companies and retailing in one or two discretionary names.
We also had a reasonable weighting in materials, but we are not particularly overweight materials and are very selective.
This was not the big Chinese companies, where we do not see much value, but instead some of the coal companies in Indonesia, which turned out to be very good value.
This positioning really helped us in the first part of the year.
Around the end of the second quarter, particularly in China but also elsewhere in the region, there was a fairly strong consensus among investors you should be in domestic stocks. You did not want to be in the exporting names.
Long term, I agree with this view. One of the key investment theses for anyone buying Asian Alpha Plus from a strategic point of view is, here is a region where there is tremendous growth and capacity for growth in domestic consumer spending, consumer services, transportation, housing and financial services.
But actually in the very short term, the sentiment has run too much towards the domestic story.
The top-down work we were doing suggested how well exporters were actually going to do – particularly the bigger companies who had survived the carnage of the withdrawal of supply from this area.
Our company contacts, particularly the Korean companies, revealed not only did you have the benefit of the devaluation of the Korean won, you also had substantial fixed costs reductions by these companies. There were some tremendous earnings to come through.
So we rotated quite effectively around Q2 into some of the exporters, including LG Chemicals and Wan Hai in Taiwan, because the survivors in the export sectors were doing extremely well with other firms having gone bust.
Unemployment in the US and UK may have gone up to 10% but this means 90% of people are still employed, and companies like Wal-Mart, Home Depot and Next, for example, do still have to find suppliers in Asia for the goods they are going to sell.
They were not going to give those contracts to smaller players where they might find the factory has shut up shop overnight.
By the end of August to September a lot of those exporters, particularly in Korea, had done extremely well – and meanwhile we had seen a 20% correction in some of the China names.
So by the end of September and start of October, we began to move money away from exports back into some of those domestic names in China.
It has been a year that has required a slightly higher level of turnover in the portfolio than I would usually expect.
What shifts have you made to holdings in recent months?
By November through to December – rather to my own frustration because it was obviously good to have got more people to buy Asian Alpha Plus and the numbers were looking good – the region itself was due a bit of consolidation. This was partly driven by the valuations having come from what were historically very cheap levels at the back end of 2008.
By the end of 2009, things like price-to-book and P/E ratios for the Asian region were actually a bit above the historic average in terms of valuations.
It was also looking a bit extended relative to its usual valuation and relative to other regions around the globe.
I was also a bit concerned about this easy consensus liquidity worldwide remains extremely ample. The US dollar keeps going down, and you have this instant transmission effect into Asia and other emerging markets.
I was concerned people were writing off the US economy too much, which proved a
correct prediction as the dollar has recovered.
I just felt things could tail off so have been moving a bit more defensively in the portfolio in the back end of 2009.
A lot of the areas like the Chinese domestic names, including the property and retailing companies, have now come back a long way. The Chinese banks are down 35% from their highs.
There is some really good value beginning to appear in some of the more adventurous sectors of the market. I have begun to take a bit of money out of slightly more defensive visible growth-type names and putting it into some of those names.
How would you describe your current positioning?
It is still neutral but I am seeing some really good opportunities in relative value. I track an average upside for the portfolio weighted across my holdings, and at the end of the year it had gone to about 13%.
By the end of January, it had expanded again to about 25%. So I can see pockets of really good relative value in the portfolio.
From a sector point of view, I tend to be overweight industrials and IT. I am a bit neutral on consumer discretionary but certainly adding money there, and have also been adding money into property companies in the region, mainly adding the margin into Hong Kong/China.
Should investors still be looking at Asia Pacific ex Japan?
From a strategic long-term view, absolutely. From a short-term timing view, if you had asked me a month or two months ago, I would have been a bit cautious about whether the time was right. Now I think it is definitely time to be putting a bit of money in.
You may find you are putting a bit more in at lower prices, but then I think you could say this about a lot of markets at the moment.
There are definitely some good specific stock opportunities in the region now and I was not really seeing this in the latter part of last year.
