Schroder Small Cap Discovery: October 2022 fund update

How it fits in a portfolio

The Schroder Small Cap Discovery Fund invests in smaller businesses that are based in Asian and emerging markets or make most of their money in these areas. Smaller and more innovative businesses offer lots of growth potential, but they're higher risk because they're at an earlier stage of their development. The fund could therefore be used in a broader investment portfolio that's able to accept more volatility in search of higher potential long-term returns. We think it could fit well with Asian and emerging markets funds focused on larger firms but should only form a smaller part of an investment portfolio.

Manager

Robin Parbrook and Alex Deane took over as the fund’s co-managers at the start of 2021. They had worked closely with the fund’s previous manager, Matthew Dobbs, for many years prior to this.

Parbrook is a veteran Asian fund manager. He joined Schroders in 1990 and has spent the bulk of his investing career living in Asia. Parbrook has managed other Asian Investments with Schroder since 2007. He has built a strong track record having outperformed the broader Asian stock market during his time as manager of these products. He has a similar fund management style to the previous manager.

Deane joined Schroders in 2015 and has been a global smaller companies and Asian equities analyst. Over that time, he worked closely with Dobbs, and provided analysis support and portfolio ideas. He has applicable analyst experience for co-managing this fund, though this is Deane’s first fund manager role, and as such he does not have his own prior track record.

There are thousands of companies in this part of the market, so the managers have the help of a team of analysts based across Asia. They help sift through the market and uncover what they believe to be the most promising opportunities.

Process

Smaller companies tend to be overlooked by many investors. But many offer lots of growth potential, often because they're using new technologies or developing exciting new and innovative products. The managers use this opportunity to spot those with exciting potential before they're noticed by other investors.

The managers work closely with Schroders' Asian and smaller companies teams to help generate research and ideas for the fund. They look for companies with good cash flows, a quality management team, superior corporate governance standards and a strong business model that's able to defend against competition. Next, they aim to forecast the earnings of each business, which could ultimately influence the share price.

The managers are prepared to be patient. They invest in companies for the long term and as they start to grow into larger firms. Many developing economies are gradually switching from being export-led to focusing on domestic consumption, and the fund is focused on areas that could benefit from greater consumer spending. It’s also focused on some of the relatively more stable Asian countries, including Hong Kong, India and Taiwan, though other high-risk emerging countries, such as Brazil and Mexico, also feature in the fund.

Over the past year the managers have reduced investments in China as they’re more concerned about the impact of government policy on businesses. They’ve increased exposure to Taiwan, India and Vietnam. This includes Zomato, a leading online food delivery platform and restaurant guide in India, and Mobile World, a leading retail chain in Vietnam with exposure to the mobile, consumer electronic, grocery and ecommerce sectors.

Culture

Schroders is a well-established asset manager with offices based all over the world. It believes the importance of Asian and emerging markets in the global economy has increased significantly over the years and expects this is to continue. We think Schroders is dedicated to investing in this part of the world and supporting the teams that invest there.

We think the managers have complementary skillsets, with Parbrook able to draw on his years of experience investing in Asia and broader knowledge of various industries, while Deane brings more technical analysis to the table. They stress the importance of company meetings and interacting with Schroders’ analysts, making use of the resource available to them.

ESG integration

Schroders has invested significantly in ESG (environmental, social and governance) resources in recent years. Each investment desk has access to a variety of data sources that have been brought together into a proprietary platform that allows investment teams to analyse a company’s performance on several ESG measures.

ESG issues have always formed part of the Asian team’s company analysis as they believe they impact the earnings sustainability of a company. Good corporate governance has always been key to the process, while the importance of environmental and social factors has also increased in recent years. The managers also engage with companies on how they can improve on sustainability issues.

Cost

This fund is available at an annual ongoing fund charge of 0.71%, after a 0.24% discount available through the HL platform. The usual ongoing charge is 0.95%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Robin Parbrook has an extensive track record and managed funds investing in Asia since the early 2000s. As always, past performance is not a guide to future returns.

Since taking over the Small Cap Discovery fund, it hasn’t performed as well as the benchmark used by Schroders to measure returns, which is made up of various smaller companies markets. The fund’s performed well against the main emerging stock market though, helped by its focus on small and medium-sized companies, which have outperformed larger businesses.

Over the past year the fund hasn’t performed as well as the emerging stock market. Investments in Taiwan have detracted from performance, particularly in more growth-orientated areas such as information technology and consumer discretionary. Technology companies Novatek Microelectronics and Vanguard International Semiconductor have been two of the weakest performers, though they performed strongly in 2021. The managers remain invested as they have confidence in the longer-term outlook.

Investments in two Russian companies also hurt performance earlier in the year. While the managers felt these were well-run businesses, Russia stopped foreign investors buying and selling its shares following its invasion of Ukraine. This meant many professional investors, including fund management groups, had to revalue their Russian investments to zero.

On the other hand, investments in India, the Philippines and Vietnam have performed better. Overall, the managers take a relatively conservative approach to investing in emerging markets and they have continued to focus on companies with good levels of cash and experienced management teams. This means the fund has tended not to fall as far when the market drops but might not outpace the market when it’s rising quickly.

Past performance is not a guide to the future. Source: Lipper IM to 31/08/2022.

Find out more about Schroder Small Cap Discovery including charges

Schroder Small Cap Discovery Key Investor Information