Small and mid-cap companies tend to be volatile investments. In a market upswing, they can post large gains but when market sentiment turns risk averse, they have the potential to post sizeable losses.
They also tend to have less access to funding, which can make them vulnerable, particularly when banks are pulling back on lending to smaller companies.
In Asia, small cap stocks tend to be under-researched but it is here that a portfolio manager with a rigorous approach to investing can reap the rewards.
Against this backdrop, Fund Selector Asia compares the Macquarie Asia New Stars Fund with the Schroder ISF Asian Smaller Companies Fund.
Investment strategy review
Both funds invest in small- to mid-cap stocks that provide growth and both avoid investing in state-owned enterprises.
The Macquarie fund is the Platinum award winner in this year’s FSA Fund Awards in Hong Kong. Co-managed by John Bugg and Sam Le Cornu, it targets companies realising structural growth and those that tend to be oriented toward domestic demand.
Laidlaw said that the managers focus on corporate governance, and that they place as much importance on avoiding poor quality investments as on getting their stock picks right. The fund is benchmarked to MSCI Asia ex-Japan Small Companies.
The Macquarie fund also has a strong exposure to the consumer sector, though this exposure is split between defensive consumer at 6.9% and cyclical consumer at 24.5% (see chart on page 2).
The Schroder fund, managed by Paul Rathband, is benchmarked to the MSCI AC Asia ex-Japan Small Index. However, the fund is run in a benchmark-unconstrained manner and it takes sizable sector bets relative to the index. For example, the portfolio’s exposure to consumer discretionary stocks was 30.2%, relative to the index’s 18.8% in November 2015.
According to Laidlaw, the fund considers factors such as the management of a company, balance sheet discipline and the strength of a business model before investing.