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Analysis of the Schroder International Selection Fund – China A
Asia funds

Analysis of the Schroder International Selection Fund – China A

It is a highly active fund, with specific bets compared to its benchmark and a strong institutional character.
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3 JUL, 2023

By RankiaPro Europe

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The Schroder International Selection Fund – China A is a fund domiciled in Luxembourg that aims to provide capital growth that exceeds the MSCI China A Onshore (Net TR) index, net of fees, over a period of three to five years. It invests in shares of Chinese companies listed and traded on exchanges such as Shenzhen or Shanghai (China A).

Schroders is a company specialized in Emerging Markets, with a long track record and a wide range of funds dedicated to these markets. In particular, this fund was launched in 2017 and is specifically focused on China A type stocks. For this company, having active funds in these types of markets is crucial because, as they say, emerging markets tend to be more volatile and usually overreact to new information, and this is where their specialized team can take advantage and bring it to their clients.

The Schroders China A fund, being an active fund, selects sectors and companies in that market, showing a concentration compared to the benchmark. Therefore, it is more suitable for investors seeking to enhance a high-conviction China A portfolio. For example, as of the end of May 2023, the fund had invested in 73 instruments, while its benchmark had 817.

Considering that it is a conviction fund, the portfolio manager actively manages it, having freedom in the composition of the portfolio compared to the benchmark. This means that it can include companies present in the reference index (albeit in different proportions) and can also include other companies and/or sectors that are interesting according to the fund’s investment process. This way of operating has led to good returns compared to the benchmark and has made the fund more than competitive compared to comparable funds.

The portfolio manager of the fund is Jack Lee, who is the Head of China A Research at Schroders and also provides coverage on China A to other strategies of the company in Emerging Asia (Asia Ex Japan), for example. He joined Schroders in 2012, has been managing the China A fund since then, and is based in Hong Kong. He has over 20 years of experience in this market in various companies and managing different funds, experience that he has brought to his current fund.

As of the end of May 2023, this strategy had over 4 billion USD in assets under management.

Evolution of the Schroder International Selection Fund – China A

Cumulative
performance
1 month 3 months YTD 1 year 3 years 5 years Since inception
Share class (Net)-9,2-13,1-6,4-11,74,413,128,2
Target-7,3-9,2-3,8-117,22,8-4,1

*Note: Past performance is not indicative of future returns. The fund’s returns may increase or decrease due to fluctuations in exchange rates.

Source: Factsheet Schroder International Selection Fund – China A, as of 31-05-2023

In the upper chart, it can be observed that the fund has delivered excellent performance since its launch, as well as over the 5-year period, which is a fundamental parameter to consider for a long-term fund. As for other time horizons, such as 3 years or the short term, the fund has had a lower return compared to its benchmark. In this case, it is important to consider that the market of the fund is China, which has shown high volatility recently, to which the rest of the market reacts quickly to news such as China’s reopening, new COVID data, economic indicators, and, naturally, being an important emerging market.

What is important to highlight here is that the fund’s investment process is robust and based on fundamental elements. Therefore, sector and company allocation depend more on this type of analysis rather than on a particular viewpoint or adaptation to current volatility.

Fund Target
Annual volatility (%) (3y)2422,7
Alpha (%) (3y)-0,6
Beta (3y)1,0
Ratio sharpe (3y)0,10,1
Information ratio (3y)-0,1
Dividend yield (%)1,9
Price to book2,6
Price to earnings19
Predicted Tracking error (%)4,9

Source : Factsheet Schroder International Selection Fund – China A, 31-05-2023

When examining the risk indicators presented in the table above, as one would expect from the previous chart, it can be noted that the 3-year Alpha is slightly negative. This means that some of the fund’s bets, both in sectors and companies, have not been able to add value compared to the overall market (benchmark). As mentioned before, this could be attributed to the fund’s robust and conviction-based investment process, which maintains positions and confidence in certain companies regardless of short-term volatility.

Regarding the Market Beta, it is equal to 1 over the three-year period, indicating that the fund carries the same systemic risk as the benchmark index. Therefore, its aim to outperform the benchmark is purely through alpha, which means gaining an advantage through strategic selection of sectors and companies to invest in.

One of the best demonstrations of the fund’s active management is its sector allocation compared to its benchmark, the MSCI China A Onshore (Net TR). We can observe significant differences in practically all sectors, with a bet on: Materials, 21.1% compared to the benchmark’s 12.1%, Healthcare, 14.9% compared to 8.9%, Financial Services, 10.7% compared to 17.1%, Information Technology, 9.4% compared to 17.8%. This leads us to believe that adding this strategy brings a lot of diversification to a portfolio that contains a fund or ETF more closely aligned with a benchmark in China A.

Positioning of Chilean pension funds in the fund

Fonte: LVA Fundmate Analysis https://fundmate.app/, 31 maggio 2023

Here we can see that Chilean pension funds currently have approximately 2.4 billion US dollars invested in the Schroder China A fund. In Chile’s AFP system, this fund is the most invested fund for the China A asset type, and according to public information as of the end of January 2023, all administrations would have investments in it.

In the upper chart, it can be observed that it is an instrument that has not only maintained a significant presence in the pension system but has also had few periods of divestment since entering the system. In fact, the amount of assets under management is approaching its peak in 2023.

Now, given the overall size of the fund – over 4 billion US dollars – it can be seen that both the process and the performance of the strategy have been validated by institutional and global investors who hold this fund in their portfolios

AdvantagesDisadvantages
Team of experts and on-the-ground presence, robust investment process, and solid track record. Large institutional fund.The fund has the flexibility to make investments beyond the companies and/or sectors of the benchmark index, which allows for alignment with the client’s allocation.

The Schroder International Selection Fund – China A is a highly active fund, with specific bets compared to its benchmark, supported by an experienced team and a strong institutional character, validated by global institutional investors.

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