The fund, which has low volatility and is rated five stars by S&P, outperforms the benchmark with returns of 50.29% over three years
Consistent positive performance, even in troubled times, separates the AXA Rosenberg Pacific (ex-Japan) Small Cap Fund from its 12-strong peer group covering the same ground. Over one to three-years, this fund has out- performed ' by far ' other funds investing in Asian small companies (excluding Japan).
Over three years, the fund has returned 50.29%, placing it at the top of S&P's league table for this sector. The next best performer is Carlson Equity Asian Small Cap, which returned 16.55% over three years, though it falls into negative ground over one year (-12.02%) compared with AXA Rosenberg's 4.78%.
Managed by Cheng Liao from AXA Rosenberg's Singapore office, the fund nearly had the lowest volatility over three years, 5.26%, compared with the most volatile in the peer group, Carlson's fund, which experienced volatility levels of 7.60% over the same period.
The fund, domiciled in Dublin and launched in 1999, invests only in smaller companies, capitalised between $20m to $2.5bn. The firm's Pacific database monitors around 700 companies, which fall within this capitalisation. It invests only in developed Asia, covering Australia, New Zealand, Singapore and Hong Kong.
The benchmark is the Cazenove Rosenberg Index Pacific ex-Japan Small Cap, which is weighted 53% in Australasia, 27% in Hong Kong and 20% in Singapore.
This fund enjoys a double-whammy of fund rating endorsements: it is rated five stars (Standard & Poor's maximum) for performance and consistent performance relative to other funds in the sector. No other fund in the peer group has five stars; the next best being Deutsche GS Asian Enterprise B and Carlson Equity Asian Small Cap, both rated four stars.
The AXA Rosenberg fund also achieved an S&P AA fund management rating (FMR). According to S&P, fewer than 20% of funds in each sector achieve an interview based on a fund management rating, graded AAA, AA and A.
The FMR rating goes beyond performance: it is based on S&P's analysis of the people, philosophy and process used to achieve that performance now and in the future.
The only other funds in the peer group with an S&P FMR are L&G Asian Smaller Companies, also AA, and Dresdner RCM Little Dragons, rated A.
Cheng Liao is partly responsible for the fund's respectable rating; he has remained with AXA Rosenberg for last 13 years. He is CEO and CIO of the Singapore office, which covers the Asia Pacific region. For the management of the Pacific funds a team of four strategy engineers ' who monitor the model outputs to ensure the fund stays within the specified risk parameters ' support him.
The fund is managed following the quantitative investment process developed by Dr Barr Rosenberg and his associates in the 1970s, and has been continuously refined since.
The process combines two quantitative models to identify mispriced stocks. One identifies relative valuations and the other models short-term predictive factors, including growth and momentum measures.
The output is put through an optimiser and automatically adjusts the weighting of longer and shorter-term factors, taking into account dealing costs as well as a target tracking error of 6% against the benchmark.
The firm seeks to add value from stock selection, not from betting on industries, countries or regions.
'Our strategy is designed to outperform the benchmark,' says Cheng. 'Therefore our stock valuation is based on relative valuation within peer groups. We build well-diversified portfolios and seek to add value from the many small mis-evaluations that occur when comparing like with like. This approach provides a stable relative performance especially in such an inefficient market like Asia.' The fund outperformed the index by 3.35% p.a. over five years.
'The fundamental bottom up valuation of stocks is key to our small cap strategy,' he says. 'Our portfolios are built on two investment ideas. First we buy companies that are relatively cheap based on an analysis of items on their balance sheet and income statement. We aim to build portfolios containing companies that are good value based on their fundamentals. Second, we consider the earnings dimensions of a stock because we see a strong connection between future earnings and various earnings measures.'
In accordance with the investment approach applied across all asset classes at AXA Rosenberg, tight risk controls and investment in technology distinguishes the firm from other investment managers.
Despite the looming effect of the impact of the Sars outbreak, there was a mixed effect on Pacific economies, says Cheng. 'Public behaviour brought on by the virus has benefited some sectors. The small-cap market made gains in April,' he says. However, he adds, the small-cap market underperformed the rest of the world as the epidemic subsequently hit retail sales, travel and other services very hard in the region.
'The impact to the equity market is not as severe as expected with only the transport, hotel and retail sectors being badly affected,' notes Cheng.
The performance of the small cap sector is more of a victim of diminishing market liquidity rather than suffering a direct impact from the outbreak. The spread of MSCI Pacific ex Japan Index (proxy for large cap) and the fund's small cap benchmark (CRI-Pacific ex Japan Index) was only 2% over the three-month period February to April 2003.
Between April and May, Cheng has made some modifications to the fund's top ten holdings, which each represent an average weight of 2% of the fund's portfolio.
The fund's top holding, Kerry Properties (2.99% of the fund's portfolio) was disposed due to privatisation by New World Development. Paperlinx (2.32%) and New Asia Realty (2%) were replaced by Shangri-La Asia, Flight Centre and Seven Network. According to Cheng, the underlying fundamentals of the companies became more attractive.
Cheng's Hong Kong stocks performed the strongest for the period February to April 2003, when Sars was already a concern, yielding a return of 4.43% versus -6.45% in the small cap benchmark.
According to Cheng, one reason is that he holds stocks with strong fundamentals as well as strong earnings prospects and these stocks tend to have higher yields and higher momentum.
Even taking into account the Sars epidemic, Cheng is optimistic that the Rosenberg's investment approach can continue to outperform the benchmark at reasonable risk, as well as constantly outperform the Cazenove Global Smaller Companies Pacific ex-Japan Index. 'We identify companies that are not only cheap but which have superior earnings prospects and whose value will be recognised by the market within a reasonable time. There are many such opportunities in Pacific ex-Japan small cap companies,' says Cheng
The Rosenberg Group was acquired by the AXA Group, one of the world's largest asset management groups, in 1999. AXA Rosenberg is the specialist equity manager within AXA Investment Managers.
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