Schroder Asian Total Return manager Robin Parbrook has won FE fundinfo’s Alpha Manager of the Year award, based on his long-term track record as well as recent performance.
Last year, his concentrated, best ideas strategy beat the benchmark by 9 percentage points and its peers by even more so. Parbrook attributed this outperformance to going overweight technology and underweight China. Stock picks in Australia and the ASEAN region also helped.
His £436m Schroder Asian Total Return investment trust returned 10.3% last year compared to just 1.3% for the MSCI Asia Pacific ex-Japan index and a 2.1% loss for the IT Asia Pacific sector.
Investors can also access the strategy via the $4.8bn Luxembourg-domiciled Schroder ISF Asian Total Return, which returned 7.4% in sterling terms last year, versus a 2.5% loss for its sector.
Performance of fund vs benchmark and sector since inception
Source: FE Analytics
Below, Parbrook tells Trustnet how he and co-manager King Fuei Lee use quantitative screens to take a view on countries, why they like tech and why they’ve taken profits in India.
Please describe your investment strategy
Parbrook: King Fuei and I believe that the Asian index is not the reason why people invest in Asia. It doesn't represent a good opportunity; you really should be completely unconstrained.
Schroders’ Asian equities team manages about $50bn and we have 40 analysts, each of whom covers about 25 stocks. Obviously we're not going to buy the sell-rated stocks, nor do we buy state-owned enterprises. We don't buy businesses that we don't believe have good long-term dynamics or where we don't trust the management, because in Asia you're always nearly always buying family-owned businesses.
That takes us down to a universe of about 200 stocks that are buy-rated by our analysts. King Fuei and I then pick the best 40 or 50 ideas.
We also have some stock screens looking at valuations and earnings momentum versus history. We look for upside to fair value, positive analysts grades and positive return on invested capital.
We leave the top-down perspective to quantitative models, which decide the level of beta to have in the fund and whether we should add capital preservation strategies.
How do your quant models work?
We have a country model for each of the main stock markets in Asia, which assumes mean reversion over time to a standard valuation matrix such as price to book, price to cash flow or dividend yields. The models forecast returns over one to two years based on historical trading patterns, valuation metrics and where we are in the business cycle.
At the end of 2022, markets were pretty bombed out in Asia. Our model was forecasting quite strong returns. Since then, China isn’t out of the woods but the rest of the Asian markets have done well.
At the beginning of this month, our model’s indicators were actually deteriorating. Following a strong rise in markets, the models were picking up on more earnings downgrades than upgrades. That means we should probably be looking to take some profits or rotate to more defensive stocks.
We also have a tactical model that looks out three to six months and incorporates economic surprise indices, inflation expectations and sentiment indicators. We then look at what ‘node’ we are in – in other words, when in the past has the economic backdrop looked similar to today and how did markets perform subsequently?
In the past couple of weeks, we have bought some puts on the Taiwanese index and the Australian index to provide some capital preservation. We’re trying to buy some cheap insurance just in case markets do fall because there is a bit of froth out there.
Puts are an attractive instrument to use because puts are cheap when markets have risen as they are a measure of complacency. We have also used VIX call options in the past. Again, they tend to be cheap when markets have just risen.
How are you positioned in China?
The main reason we performed well in 2023 was that we got China right. When China reopened last year (and this is one of the advantages of having a team in Shanghai) we could tell the animal spirits weren’t there. Reopening was a damp squib and we sold most of our Chinese stocks.
Our models are still quite cautious on China because business cycle indicators are negative and earnings downgrades are huge. Despite what the China bulls say, valuations in China are not cheap because of the lack of earnings momentum.
Another reason we're quite cautious on China is because there is irrational allocation of capital to anything that is a strategic priority for the Chinese authorities. State-owned capitalism will generate economic growth, but it will generate very poor returns on invested capital.
What were the other reasons behind strong performance last year?
The other positive contribution was the rebound in the tech stocks. The fund is nearly always overweight tech. We took a bit off the table at the end of 2021 but nowhere near enough, so we had some performance issues in 2022, but in 2023 the rebound in stocks such as Taiwan Semiconductor Manufacturing Company (TSMC) and MediaTek was helpful.
In Australia some of our healthcare stocks did quite well, while we were correctly cautious of Australian banks. A few stock-specific names in the ASEAN markets did well and that offset negative numbers in India, so those factors balanced each other out.
Why are you always overweight technology?
Tech stocks are the best companies in Asia. The best company I've seen in the 34 years I've been investing in Asia is TSMC by some margin because of its singular focus on process, process, process and delivering the best results. No-one can compete with TSMC’s leading-edge chips so it has genuine intellectual property and huge barriers to entry, which means it sustains a high return on invested capital.
Because TSMC is so dominant in Taiwan, it creates a clustering effect of good companies around it such as MediaTek, Realtek, Novatek, Advantek and Chroma, which is hard to replicate anywhere else. These are the best companies in Asia. This is what you want to own, in a nutshell.
MediaTek is one of the largest chip designers in Taiwan. It is taking market share and it benefits from having its main design centre in Hsinchu, right next to TSMC.
We are overweight semiconductors including Samsung and SK Hynix in South Korea so the next move is probably to take profits.
The semiconductor industry exhibits good solid revenue growth of 5% to 7% per annum. The world is continually becoming more semiconductor-intensive, but semiconductors fall in value every year because TSMC and Samsung drive prices down, which makes them fairly oligopolistic. It does mean that revenue growth is probably never quite as high as we think, because prices are falling whilst demand is growing very strongly. I don't think artificial intelligence really changes that.
How are you positioned in India?
We're actually slightly underweight India at the moment. The problem with India is that valuations increasingly reflect the good news so we've been taking profits, possibly too early.
In 2023, the one market where we clearly underperformed versus the benchmark in our stock selection was India, because we were too cautious. Domestic investors are quite active in India. They like growth and momentum and are not so worried about valuations. We are bottom-up value-orientated, so we really struggled to get our heads around why we’d pay 60-70x earnings for Indian consumer staples stocks.
We still like bits of the Indian market – healthcare, banks, some IT services companies – but in general, we have been relatively cautious just because of the valuations.
What do you enjoy doing outside of portfolio management?
I've always been a runner and I’m currently training for a half marathon with my daughter. I also play golf and I love hiking.