Winner of Best Singapore Equity Fund - Schroder Singapore Trust SGD A Dis
Inception Date: 1993-02-01
Morningstar Rating (2020-02-29): ★★★★
Manager: Seok Hooi Teoh
Q1) Can you highlight any major changes you made to the portfolio over the course of 2019? Were there any particular holding(s) or theme(s) that drove the fund’s performance for the year?
Over the course of the year, the two most important themes which dominated equity markets were the ebb and flow of trade tensions between the US and its trading partners (notably China), coupled with the flood of liquidity driven by central banks’ accommodative monetary policy. The former, manifesting through both tariff and non-tariff-related means, has had a tangible impact on economic activity given highly-intertwined global supply chains. Certain countries benefitted as companies began to build out alternate supply chains, but most other nations were negatively affected. Monetary easing served to counteract this, cushioning the negative impact of trade tensions with lower interest rates and generous liquidity, whilst keeping asset prices and earnings expectations aloft.
Given the wide range of macro and market outcomes from the interplay of these factors, the Fund had therefore positioned with an overweight in beneficiaries of monetary easing, and also focussed on selected “shallow cyclicals. For 2019, positive allocation to real estate developers and stock selection in REITs were key contributors to performance. Our overweight in real estate developers did well as share prices recovered following an overreaction to property cooling measures of the previous year (2018), while demand for good quality projects remained firm through 2019. The REIT sector benefitted from compressing long bond yields and a relative “flight to safety”, as investors rotated to sectors with more stable dividend yield support. Positive stock selection within the sector also drove performance over the year.
Q2) What are some specific opportunities you have identified for 2020, and do you expect your 2019 outperformers to persist in 2020? What are the top risk factors that could impact your portfolio, and how are you positioned to mitigate these potential risks?
Q3) In which areas do you think risk is over/understated with respect to (i) the outcome of the US Presidential election, (ii) persistently loose monetary policies by major economies, (iii) Coronavirus impact on global growth, and how are you expressing these views in your portfolio?
2020 has begun on more cautious tone. Before Covid-19 (rightly) became the “fear du jour”, there were early hopes of a “Phase One” trade deal eventually leading to macro recovery. However, ongoing trends of supply chain dislocation and digital disruption have manifested in a pattern of narrowing market breadth. Investors were willing to pay higher premia for growth, and these resulted in stretched valuations for such names. The recent Covid-19 selloff has shown that at some point, even valuations of favoured names may have to partially mean-revert.
The sheer scale of unprecedented and wide-ranging policy responses to contain the spread of Covid-19 imply that we should be prepared for far more earnings and valuation volatility ahead. The defensive theme has now taken on a more urgent tone with the spread of COVID-19 going global. Control measures implemented by various countries to stem virus proliferation have precipitated major disruption not only to global travel and trade, but also to normal business activities. “Social distancing” measures in some countries have led to cessation of daily activities outside the home. The fear is that big economies such as the US may soon emulate these on a large scale. Thus, if a deep and prolonged global recession were the cumulative outcome of these individual country actions, it could significantly impact countries with significant global trade and tourism linkages, such as Singapore.
Central banks globally have taken an aggressive, pre-emptive approach to stave off the Covid-19 economic impact via sizeable rate cuts, and we are likely to see the further policy rate cuts as the situation drags on. Such measures further perpetuate the loose monetary policies of the past decade.
The question is whether such responses will suffice once policy rates approach zero. Thus, recent fiscal stimulus policies in several countries represent a very interesting development, in terms of balancing out the heavy reliance on monetary policy as the “stimulus tool of choice” of the past decade. Especially if the largest economies and economic blocs such as the US and EU can pivot in this direction. At this juncture (12 Mar 2020), we are maintaining a more defensive stance given the limited visibility on when the COVID-19 situation will come under control and fluidity of policy responses to slow the disease proliferation. We look to selectively buy good quality franchises if they get to oversold levels. The current market sell down presents us with a unique opportunity to pick up some of these names, which will hopefully see a stronger recovery when the crisis subsides.
Q4) How is your investment team organized? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future?
We have a wide investment footprint across the region to support our fundamental investment approach. Our analysts and fund managers work closely together in team-based approach. Our analysts are career analysts, and their coverage is country-focussed, except for financials and certain cyclicals which are sector-focussed. Our fund managers are responsible for stock selection in constructing a portfolio comprised of bottom-up ideas that come together to deliver the best risk-adjusted outcomes for our clients. They work together with analysts who conduct deep dive analysis to gain investment insights, as well as collaboratively seeking out new investment ideas. While there have been no changes to the investment team based in Singapore, we have been adding to our research resources in the Greater China region.
Q5) Where do you feel that the investment team or the investment process can be improved upon in the future?
Digital disruption, the longer-term implications of AI displacement of jobs for many industries, and the ramifications for countries’ structural growth and monetary/fiscal policy responses are some areas that will gain more attention. We also continue to focus on ways to ensure ESG and sustainability factors are incorporated more systematically and explicitly into the research and thinking of our equity analysts. Finally, for equities in general, valuation in a world of near-zero “risk-free” interest rates.
View all Morningstar Singapore Fund Awards 2020 articles here.