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Asian Smaller Companies head to head

Added 20th November 2014

For this week’s feature, Fund Selector Asia takes a look at funds from Aberdeen Asset Management and Franklin Templeton Investments that invest in Asian small-cap companies.

Asian Smaller Companies head to head

The key structural difference between the products is that the Aberdeen Asian Smaller Companies Fund is a Singapore-domiciled fund, which feeds into the Luxembourg-registered Asian Smaller Companies Fund while the Templeton Asian Smaller Companies Fund is Luxembourg-registered vehicle.

The Aberdeen fund, which was launched in September 2006, is relatively smaller in size with assets worth S$216.2m ($165.9m) as of 30 September. The underlying fund manages S$5.6bn ($4.3bn) worth of assets.
 
The Templeton fund, which was incepted in October 2008, has $1.17bn in assets under management. 
 
Ryan Sim, vice president, global wealth management at OCBC Bank shares his perspectives on these two funds. 

Investment strategy review

The Aberdeen fund’s geographic exposure covers Asia Pacific ex-Japan while the Templeton fund has a slightly smaller scope of Asia ex-Japan, noted Sim.
 
Given the slight difference in geographical exposure, the Aberdeen Asian Smaller Companies measures itself against the MSCI AC Asia Pacific ex- Japan Small Cap Index, which includes a wider range of countries, with the inclusion of Australia and New Zealand, he said.
 
Templeton Asian Smaller Companies benchmarks itself against the MSCI AC Asia ex-Japan Small Cap Index.
 
As of 30 September, the top country allocation of the Templeton fund was in South Korea with a 33.1% weighting, compared to an 18.2% weighting of the country in the fund’s benchmark MSCI AC Asia ex-Japan Small Cap Index. 
 
The fund is also overweight India, with a 23.6% weighting compared to a 7.2% representation of the country in the index. The fund is underweight China with a 15.9% allocation compared to the country’s 21% weighting in its index.
 
In the Aberdeen fund, according to the 30 September factsheet, Singapore companies enjoy the highest allocation with a 18.4% weighting, followed by Malaysia and India that respectively have a 15.6% and 12.4% allocation in the portfolio.
 
“The Aberdeen fund seems to have a higher exposure to the developed markets within Asia ex-Japan, with exposure to Singapore, Hong Kong and Australia making up about 33% of the portfolio. Conversely, Singapore and Hong Kong makes up only 8.5% of Templeton’s portfolio.”
 
In terms of sector allocation, consumer staples and discretionary sectors, along with financials, comprise more than half of the portfolio in both funds. 
 
At the end of September, the Aberdeen fund had a 26.3%% weighting in financials, followed by consumer discretionary (20.1%) and industrials (14.6%). Consumer staples accounted for 9.7% of the fund’s assets.
 
The Templeton fund was overweight in consumer discretionary (33.3% weighting compared to an 18.7% representation of the sector in the index) and consumer staples (7.6% weighting compared to 6%). It has a slight underweight position in financials (19.2% compared to a 19.7% weighting in the index).
 
“The two funds do not have any similar holdings in the top 10, reflecting the wide universe of stocks available in the small cap market.”
 
The top three stock picks of the Aberdeen fund are Millennium & Copthorne Hotels, Aeon Co and Bukit Sembawang, while the top holdings of the Templeton fund are Bajaj Auto, Tata Chemicals and LF. 
 
The Aberdeen fund has a 2.8% cash holding, far smaller than the the Templeton fund with an 11.5% cash position.

Performance review

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Sim reviewed these funds, taking into consideration key periods such as the recent market correction between September and October, the taper tantrum in 2013 and the European debt crisis in 2011.
 
During the taper tantrum of 2013, using the comparison period between 21 May 2013 to 25 June 2013, the Aberdeen Asian Smaller Companies fell 12.1% compared to its Templeton peer, which fell 13%. 
 
“We also saw a slightly greater downside displayed by the Templeton Asian Smaller Companies during the correction period of the European debt crisis in the third quarter of 2011, when the fund fell 20.9% compared to Aberdeen’s decline of 14.5%," Sim said.
 
A comparative review of the two funds in terms of calendar years with data from Morningstar:
 
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“Another notable observation is that during the down period in 2011, the Aberdeen fund outperforms again.”
 
According to him, this might to some extent indicate Aberdeen Asian Smaller Companies having better downside mitigation than the Templeton fund. 
 
However, when markets are positive, the Templeton fund tends to outperform the Aberdeen vehicle, he added.
 
Sim is of the opinion that the Aberdeen fund tends to perform relatively better in times of market instability or volatility while the Templeton fund performs better over a longer time period. 

Portfolio Managers

Aberdeen does not name the lead portfolio manager and would only say that the Asian equity team manages the fund. 
 
According to the fund house’s prospectus, Chong Yoon Chou who joined the Aberdeen Group in 1994 is an investment director on the Asian equities team. Flavia Cheong is also an investment director on the team, responsible for company research and regional portfolio construction.
 
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The Templeton fund's manager is Mark Mobius, the firm’s managing director, who has been in charge of the fund since its inception in 2008. Mobius joined Templeton in 1987 as president of the Templeton Emerging Markets Fund. He currently directs the analysts based in Templeton's 11 emerging markets offices and manages the emerging market portfolios. 
 
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Fees

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Both the Aberdeen and Templeton fund have the same initial charge of 5%. But the annual management fees of the Aberdeen fund (1.5%) are higher than those charged by the Templeton fund (1.35%).
 
“One point to note though, is that the Aberdeen Asian Smaller Companies Fund is included in the CPF Investment Scheme [Singapore's retirement plan for ordinary accounts], and thus for investments using this mode, the maximum frontend fee that can be charged is 3%,” Sim said.
 
The Aberdeen fund’s TER, as mentioned in its prospectus, was 1.82% for the year to September 2013. According to the prospectus of the Templeton fund, the total expense ratio was 2.24% for the year ended June. 

Conclusion

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Both funds offer similar investment opportunity where Asia ex-Japan small caps are concerned and have offered good returns to investors since 2009 (using like-for-like comparison as Templeton’s fund was only incepted in late 2008). 
 
“Looking at the trend of returns, it is safe to assume both funds are likely to perform in a similar pattern during various market cycles or events.
 
“However, taking into consideration the performance data and the higher exposure of Aberdeen to developed Asian markets, we could expect Aberdeen to slightly outperform Templeton during volatile or down markets.
 
“Those seeking higher upside and able to digest higher volatility in the process could look at Templeton’s offer.”
 

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