Both the Fidelity Asian Smaller Companies Fund and the JP Morgan Eastern Smaller Companies Fund are similar in terms of size, but the JP Morgan vehicle has a much longer track record.
The Luxembourg-domiciled Fidelity fund was launched in December 2011 whereas the Hong Kong-based JP Morgan fund has been in existence since December 1991.
On 31 December, the Fidelity fund had $190m in assets under management compared to AUM of $188m for the JP Morgan fund.
The major differentiating factor between the two products lies in investment style. The Fidelity fund adopts a value-based investment approach with the manager employing a two-to-three year investment horizon on stocks. The JP Morgan fund uses a blend of value and growth-investment styles.
Luke Ng, vice president at FE, provides a comparative analysis.
Investment strategy review
The Fidelity fund invests in Asian smaller companies, but also has a mandate to invest in companies with a market capitalisation outside this range.
On the other hand, the JP Morgan fund aims to invest in small and medium-sized companies in Asia-Pacific, excluding Japan and Australia. However, the fund factsheet said it has a provision to invest in these two markets when appropriate investment opportunities arise.
The Fidelity fund benchmarks its performance against the MSCI AC Asia Pacific ex-Japan Small Cap Index (Australia capped at 10%). The benchmark of JP Morgan’s fund is the MSCI AC Asia ex Japan Small Cap Index.
“Both Fidelity and JP Morgan pay strong attention to due diligence when assessing companies in order to understand the business and management before making investment decisions.
“The major difference comes from [allocation to] Australia. The Fidelity fund is investing in the country but the JPMorgan vehicle is not.”
Australia is the second largest country exposure of the Fidelity fund with a 12.8% allocation, with India being its top country bet (15% weighting).
By comparison, the JP Morgan fund had a 22.7% China weighting in the portfolio, followed by India and Korea with a 17.1% and 16.6% allocation, respectively.
“Managers of both funds are overweighting stocks in India and underweighting those in Taiwan relative to their benchmarks. Meanwhile, JP Morgan is relatively positive on stocks in China and Hong Kong.”
Both fund managers prefer to hold a diversified portfolio of over 100 stocks, and weighting of a single holding rarely goes over 3-4%, Ng highlighted.
Both funds also consider liquidity an important issue and tend to hold a certain portion of investment in large-cap stocks, thus making non-benchmark bets.
The top three holdings of the Fidelity fund were in Cognizant Technology Solutions, Slater & Gordon and Religare Healthcare, whereas the top positions of the JP Morgan fund were in Techtronic Industries, Minth Group and Eicher Motors.
“Nitin Bajaj, the manager of Fidelity’s fund, pursues a pure bottom-up approach, and he rarely buys into a business when the valuation is high. For JP Morgan [managers] Joanna Kwok and Rajendra Nair primarily adopt a bottom-up approach, but would occasionally make macro calls when they see fit.
“Overweighting banks and underweighting properties are examples [of macro calls], as the fund managers are expecting an interest rate hike from the US.”
Coming to sector orientation, the Fidelity fund has largest exposures in consumer discretionary (28.3%), financials (20.4%) and information technology companies (11.1%). The JP Morgan product also has its highest allocation toward consumer discretionary (28.5%), financials (20%) along with industrial sectors (20.9%).
“JPMorgan is more willing to tolerate higher valuations when investing into businesses that the managers favor.
“Overall, the Fidelity fund is value-biased whereas the JPMorgan fund invests into a mixture of value and growth stocks."
According to FE Analytics, the Fidelity fund registered 18.6% and 18.3% returns over one- and three-year horizons (to 4 February).
The JP Morgan fund reported 15.5% and 13.7% returns, respectively, during the same time periods.
The Fidelity fund was ranked in the first quartile during both one- and three-year time periods. The JP Morgan product was placed in the second quartile during the same periods.
Worthwhile to note is the JP Morgan fund (which has a longer track record) was placed in the first quartile over five- and ten-year horizons with 8.1% and 7.2% returns, respectively.
“The Fidelity fund outperformed the JP Morgan fund over the past one and three years in relative terms. Both funds have outperformed their respective benchmarks by big margins over those periods. Both funds seem to be benefiting mainly from good stock selection and overweight positions in India,” noted Ng.
Looking at the short-term performance of the funds, the Fidelity fund gave a 2.5% and 0.2% return over one-month and three-month periods to 4 February, while the return fell by 0.2% over a six-month period.
The JP Morgan fund posted 2.1%, 3.1% and 2.2% returns over the same one-, three-, and six-month periods.
In terms of calendar year performance, the Fidelity fund registered a 13.4% return in 2014 compared to the 6.2% return offered by the JP Morgan fund. In 2013, the year of the taper tantrum, the Fidelity fund recorded a 30.8% return compared to 15.9% posted by the JP Morgan fund.
In 2012, the Fidelity fund gave a 22.4% return while the JP Morgan fund registered a 32.7% return.
“Both funds earn the highest FE Crown Rating of 5, indicating that they delivered superior risk-adjusted performance over the past three years,” Ng highlighted.
The FE Crown Rating ranks funds based on alpha, consistency and volatility.
Nitin Bajaj has been managing the Fidelity fund since September 2013. Bajaj joined Fidelity International in 2003 as a research analyst in London and became an assistant portfolio manager in 2007 for the Global Special Situations Fund in the UK.
“Prior to taking over the fund in 2013, Nitin Bajaj was the manager of two Indian equity funds in Fidelity,” Ng pointed out.
Joanna Kwok has been managing the JP Morgan fund since September 2009. Rajendra Nair joined Kwok as a co-manager in July 2013.
Kwok has over 16 years of investment experience and is currently a regional investment manager with the Pacific regional group located in Hong Kong. She also manages the JP Morgan SAR Asian Fund. Previously, she managed the JP Morgan Australia and the JP Morgan Asia Pacific Income vehicles.
Nair is currently also managing the JP Morgan India Fund. Nair started his career at JP Morgan securities in 2000.
Both the funds have similar management fees of 1.5%.
The ongoing charges or the total expense ratio for the Fidelity fund is 2.01% the TER for the JP Morgan product is 1.70%.
“Latest total expense ratios of both funds are within a reasonable range,” Ng commented.
According to Ng, both Fidelity and JP Morgan fund managers have performed well in the past and demonstrated solid experience in their field.
Both funds have a strong investment process and methodology, despite different focus areas.
“It seems that both managers are utilising their expertise in India for their funds as they see great investment opportunities emerging in the smaller cap space in the country.
“Overall, the Fidelity fund should offer better downside protection due to the lower valuations of initial investments, whereas the JPMorgan fund would tend to benefit more from a rising market.”