The top-performing Schroders fund, which uses derivatives to protect against market volatility, has been closed to new investors for nearly three years. However FE Alpha Manager Robin Parbrook and Lee King Fuei took over the Henderson Asian Growth Trust four months ago, and have reshaped it to follow their open-ended mandate.
Monica Tepes, investment companies analyst at Cantor Fitzgerald, says that it offers a great opportunity to get access to this unusual, top-performing strategy, and warns that demand could see shares become more expensive in the future, thanks to its "unique strategy" and "stellar track record".
Schroder ISF Asian Total Return has made more than four times the returns of its benchmark since July 2008, according to data from FE Analytics, with significantly lower volatility and downside risk.
The fund has returned 128.08 per cent since the start of our data, while the MSCI Asia Pacific ex Japan benchmark has made just 29 per cent.
Performance of fund vs benchmark since July 2008
Source: FE Analytics
This means that although the fund sits in the IMA Specialist sector it has returned more than all but two funds in the IMA Asia Pacific ex Japan sector – Aberdeen Global Asian Smaller Companies and Newton Asian Income.
Over three years, the fund has displayed volatility of just 12.05 per cent compared with 21.63 per cent from its benchmark, while the maximum drawdown – the most investors could have lost if they had bought and sold at the worst possible times – is just 12.45 per cent, compared with 30.83 per cent for the index.
Tepes explains that this is partly due to the fund’s successful use of derivatives.
"The derivatives overlay has worked really well, but there are no attribution numbers to work out how much it has added exactly to performance," he said.
"However, the manager says it is not the most important contributor, which comes from alpha-generating stock-picks, but that it overall has reduced volatility, which is great."
"Asian markets are very volatile. In every single period of falls of over 7 or 8 per cent, the portfolio has lost less money than the market."
The managers first pick stocks, then look at the market they are in and come to a view on the one-year prospects for the country, concentrating on valuations.
If they think the market as a whole looks expensive or has some problems on the horizon, they will use derivatives to hedge that risk away, leaving the fund benefiting from just the outperformance of the stock versus the index.
The strategy is therefore reliant on the forecasts used to select the derivatives being correct. Tepes says that they derive from a financial model rather than the personal opinion of the manager, however.
The managers also use a second level of overlay, she explains, which looks at the Asia Pacific region as a whole on a three-month view and hedges the portfolio against any expected corrections.
The extent of the short positions can vary, but it has been around or above 25 per cent of long exposure for the past two years.
The other key strength of the fund is the managers’ off-benchmark approach, which could be particularly attractive for investors in an environment where emerging market indices have been performing poorly.
"It has got very little overlap with the MSCI Asia Pacific ex Japan index," Tepes said. "If you look through the top-10 holdings, you can see they are ignoring the index."
"His [Parbrook’s] opinion is that most of the companies in there do not really represent the Asian domestic economy."
"Where he sees the opportunities for earnings growth are outside the index; he says you need to go out and look at the companies."
At the last count there was just a 10 per cent overlap, Tepes explains, adding that this should serve the fund well in the future.
"The indices are not really representative of Asia as such. If you want to outperform an index, the best chance is to have little overlap."
"In Asia and the emerging markets, the indices can be dominated by large companies partly owned by the governments, which tend to have corporate governance issues and tend to be driven by politics."
Parbrook and King Fuei took over in March and data from FE Analytics shows that the trust has performed in line with the benchmark since then, returning 0.5 per cent against a 1.52 per cent gain for the index.
Performance of trust vs sector and benchmark over 4 months
Source: FE Analytics
The trust was trading on a big discount prior to the new management joining, following disappointing performance.
However, it has moved on to a small premium of 1.8 per cent according to AIC data, and has been trading just above and just below par.
Tepes says that she would have no problem investing at the current level, however, and warns that it is hard to say what will be the natural trading range of these shares given the managers have been in situ for such a short period of time.
Before it was taken over by Schroders, the trust was twice the size, but carried out a buyback programme that saw half the share capital wiped out. Its market cap is now £148.7m.
Tepes says that Schroders would be likely to have planned to take over a trust twice the size, meaning that it could well issue shares in the future up to at least that amount.
However, waiting for this issue might be unwise, as there is no guarantee.
In the meantime, the trust offers very good protection from market falls, which could in itself justify holding this trust over another, even on a slight premium.
The ongoing charges are currently 0.9 per cent, according to the AIC, and there is a performance fee which Schroders has agreed to waive until September.
