Schroder Asian Discovery: October 2023 fund update

In this update, Investment Analyst Henry Ince shares our analysis on the manager, process, culture, ESG integration, cost, and performance of the Schroder Asian Discovery fund.

• Robin Parbrook and Alex Deane hunt for high quality smaller companies in Asia
• Schroders have plenty of resource with over 35 analysts providing research ideas
• Performance has been strong since this management duo took over
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Schroder Asian Discovery fund aims to grow capital over the long-term by investing in higher-risk emerging market and Asian (excluding Japan) companies. The fund mainly invests in small and medium-sized companies which offer lots of growth potential but can involve more risk because they're at an earlier stage of their development.

Given its focus on smaller companies, this fund could work well alongside other funds investing in larger Asian companies as part of a globally diversified portfolio. With regards to style, its focus on ‘growth’ could also be blended with more ‘value’ oriented investments.

In January 2023, Schroders changed the name of this fund from Schroder Small Cap Discovery to its current name, Schroder Asian Discovery. The fund’s benchmark was also changed to include medium sized companies which has broadened the opportunity set available. The fund is still being managed with the same philosophy and process with these changes being made to better reflect how the fund was already being managed.

Manager

Robin Parbrook is a veteran investor in Asia and has co-managed this fund since the start of 2021. He joined Schroders in 1990 and has spent a large part of his investment career living in Asia. Whilst he no longer lives in the region, he still spends several months a year there meeting companies. Along with this fund, he also manages other investments in Asia with a similar investment process and we feel he can comfortably handle these responsibilities.

Alex Deane is also a co-manager of the fund and assumed responsibilities at the same time as Parbrook. Before joining Schroders in 2015, he was an analyst at Rothschild & Co and Berenberg. Deane has relevant analyst experience with global and Asian smaller companies and is starting to build a track record of his own. We are continuing to get to know Deane as an investor but currently our key conviction lies with Parbrook.

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 are ‘bottom-up’ stock pickers which means they spend much of their time understanding the quality, performance drivers and valuation of individual companies.

When it comes to quality, companies should have a strong business model which is able to efficiently generate income and defend against competition. They should be financially robust and run by an experienced and aligned management team.

Once the quality has been determined, companies fall into two buckets. ‘Compounders’ which have long-term structural growth drivers and can sustainably re-invest back into the business over time. The second is ‘opportunistic', and their success may be reliant on a specific factor such as a change in sentiment or strategy. Typically, compounders will make up most of the portfolio.

When they make any investment, they are prepared to be patient and invest with the long-term in mind. They also don’t want to overpay for a company’s growth prospects so the team spend lots of time understanding what a company is worth.

This process whittles down a universe of around 2,400 companies to a final portfolio of between 40-50. When it comes to putting all the pieces together, they aren’t afraid to go off-piste. For example, they invest in countries like Mexico, Peru and Vietnam which don’t form part of the benchmark. Geographically, India, Taiwan, and China account for around 60% of the fund. That said, they invest a lot less than the benchmark in China. Sector wise, they find most opportunities in information technology, consumer discretionary and financials.

Over the past year the managers have made several changes to the portfolio. Examples of new purchases include Indian financials business, PB Fintech and FPT Corp, a Vietnamese IT services provider. In contrast, they sold a few including two Korean companies, KoMiCo and PI Advanced Materials after a rally in their share price which provided an exit opportunity.

Culture

Schroders is a well-established asset manager with offices 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 to continue. We think Schroders is dedicated to investing in this part of the world and supporting the teams that invest there.

We believe incentivisation for Schroders fund managers and analysts is focused on longer-term performance potential and is therefore aligned with their investors. The Asian equities team is based across the UK and Asia, and this remains an important resource for the group’s range of Asian funds.

ESG integration

Schroders has invested significantly in environmental, social and governance (ESG) resources and tools in recent years. Each investment desk has access to a variety of data sources that have been brought together into a proprietary platform called SustainEx, which allows investment teams to quantify a company’s positive and negative contributions to society. The ESG agenda at Schroders has significant support from senior management, and in 2019, the firm completed its acquisition of impact investment specialist Blue Orchard.

All Schroders funds were required to pass the firm’s inhouse ESG accreditation process by the end of 2020. All new funds must also be ESG accredited, and investment teams must reapply for accreditation on an ongoing basis. The ESG accreditation process is managed by the Sustainability team. They sit on the investment desk and are objective in their approach. There is a set list of criteria that funds must meet to become accredited, and the process is substantial – no fund has ever gained accreditation on the first attempt. Fund managers are also expected to demonstrate improved levels of ESG integration over time.

The Schroders Sustainability team acts as a focal point for ESG, proxy voting, and engagement. When it comes to proxy voting, Schroders has structured policies in place and is transparent on the reasons proposals have been voted against. On the ESG engagement side, the firm’s activities and outcomes are monitored, tracked and reported in their quarterly Sustainable Investment reports and annual Sustainability reports. There are also a range of ESG-related insight and thought leadership articles available on the firm’s website.

Cost

The ongoing charge for this fund is 1.02%, but HL clients benefit from a saving of 0.24%, resulting in a net ongoing charge of 0.78%. This saving is provided through a 'loyalty bonus', which is tax-free in an ISA or SIPP. However, this may be subject to tax in a Fund and Share Account. The HL platform fee of up to 0.45% per annum also applies.

Performance

Since the fund launched in March 2012, it’s outperformed the IA Asia Pacific excluding Japan sector average. However, investors should remember that much of this performance cannot be attributed to the current management duo. It’s also important to remember that the fund has changed its benchmark and objective over this period too.

Since the current management duo took over at the start of 2021, the fund has returned 7.68%* vs -7.63% for the IA peer group. Given their focus on higher-quality companies, we would typically expect this fund to outperform in a falling market and be exposed to less investment risk along the way. As always, past performance is not a guide to future returns.

Over the past 12 months, the fund returned 4.25% vs 0.46% for the IA sector average. Some of the biggest contributors have included Dutch Semiconductor company, BE Semi, Cholamandalam Investment, the Indian financial company, and Taiwanese electronics company Chroma ATE. In contrast, Philippines retailer Wilcon Depot and Tongdao Liepin, the Chinese recruitment firm were among the weaker performers. Investing less in China more broadly was also helpful for relative performance.

Whilst valuations in some parts of the region like India could pose short-term headwinds, the managers continue to find opportunities throughout Asia and believe the key long-term themes like consumption, healthcare, financial inclusion, and green technology remain in-tact.

Past performance isn't a guide to the future. Source: *Lipper IM to 30/09/2023.

Find out more about Schroder Asian Discovery including charges

Schroder Asian Discovery Key Investor Information