Aberdeen Standard Investments has long had one of the most highly regarded Asia-Pacific equity investment franchises among global fund houses – but the sustainability of those credentials is being questioned as the British firm sees another senior departure.
ASI's Asia-Pacific equity team is “experienced, proven, and well-resourced” but “can no longer be considered best-in-class”, fund research house Morningstar said in a client note late last month. This is the result of the desk's high turnover of late and its more aggressive approach to Chinese stocks, wrote senior analyst Andrew Daniel.
The changes are likely to matter to ASI's business; institutional investors and intermediary distributors typically monitor portfolio manager and strategy changes to assess their potential effect on the performance of commingled funds and segregated mandates.
Historically ASI's Asia equity team has been very stable, but that has changed over the past three years, with more than 15 investment professionals moving on since the start of 2017, Wing Chan, head of Asia research at Morningstar, told AsianInvestor.
Hong Kong and Kuala Lumpur have seen the biggest impact, with eight individuals leaving those branches in that period, according to the note, without specifying names. Among the Hong Kong departees were portfolio managers Kathy Kejia Xu, who moved to APG Asset Management last year, and Frank Tian, who left in 2017.
That's a high level of turnover even by Asian investment team standards, Chan said.
The turnover can be partly explained by the merger of Aberdeen and Standard Life unveiled in March 2017 – but it is still continuing.
AsianInvestor has learned that Ambrose Tan, head of dealing for Asia Pacific, will be leaving at the end of 2019 after 13 years with ASI. The company said he would be succeeded by senior credit trader Susana Ho and senior equity dealer Richard Ang. They will oversee fixed income and equity dealing for the region, respectively.
In the Morningstar note, Daniel said: “While not all turnover has been voluntary, and most openings have been backfilled, the team nonetheless remains in flux and can no longer be considered best-in-class.”
All this being said, the Asia-Pacific equity team is still around 50-strong, having been expanded over the previous five years, said a spokeswoman for ASI.
“A degree of natural turnover occurs in the ordinary course of business activity,” she added. “We have a relatively low level of turnover within the Asia-Pacific equity team, and many fund managers have been on the desk for over a decade, with strong continuity in leadership.”
Certainly, the team, led by the experienced Flavia Cheong, is larger than most and “still above average”, Chan said. “But we no longer view it a top-notch investment unit.”
This is partly down to the proliferation of rivals. "The number and quality of equity investors in China A-shares has really improved in recent years, and Aberdeen Standard realised it needed to lift its game to stay competitive,” said Chan. He noted that this was one of the drivers behind the changes.
ASI has taken some positive steps since the merger, such as assigning sector coverage responsibilities to investment managers and overhauling the remuneration structure, which should improve accountability for stock picks going forward, the Morningstar note added.
However, on top of the staff changes, “adding another element of uncertainty is an evolving investment approach”, Daniel wrote.
“Amid poor [third-quartile] performance in 2017, the team revisited its thinking on many China names – which it had long avoided due to corporate governance and transparency issues – and has since added aggressively there.”
While it is promising to see that the team is becoming more flexible, the note continued, the shift raised concerns that the team has become more relaxed on corporate governance standards.
“What’s more, the team’s stated effort to focus more on stock selection has led to reined-in sector/country deviations and falling active share compared with the MSCI AC Asia Pacific ex Japan Index,” it said.
The change in approach led to an improved performance from January 1, 2018 through October 31, 2019, largely driven by Chinese stock selection, Morningstar said.
Consequently, it returned a top-quartile performance in 2018 after sitting in the third quartile in the prior two years. But it was in the third quartile for 2019 as of late November.
Ultimately, wrote Daniel, “the team has more to prove on this front”.
CHINA MARKET EVOLUTION
In respect of the governance questions raised, the ASI spokeswoman said: “Overall, the direction of travel for governance in China is steadily heading in the right direction, and this has gone hand-in-hand with our increasing comfort of investing in this market.”
And of course ASI is not alone in its aggressive push into Chinese assets.
Compared with three to five years ago, global fund houses have substantially increased their A-share coverage, from as little as 30 to 50 unique names to at least 100, Chan said. “They're digging a lot deeper into the opportunity set.”
At the same time, he added, Chinese firms have been ramping up their investment resources, placing a greater focus on fundamentals and thus reducing their portfolio turnover.
Even some large foreign pension fund allocators – such as Dutch pension fund giant APG Asset Management – have built teams to invest directly into A-shares.
“As the market becomes increasingly institutionalised, it is fast becoming more efficient,” Chan said.
Fear of missing out on potentially big gains is clearly playing a big part; many investors feel the A-share risk is worth taking for the potential returns. And given they now have more visibility of the market, that is perhaps not so surprising.