2019 Best Singapore Equity Fund Winner Q&A - Schroder Singapore Trust SGD A Dis

M: Morningstar S: Schroder

M: Can you highlight any major changes you made to the portfolio over the course of 2018? Were there any particular holding(s) that drove the fund’s performance for the year?

S: We took a view that markets were grappling with the combination of earnings pressure from new competitors and digital disruption, a cycle of monetary policy tightening, and valuations that did not provide sufficient cushion for potential downside surprises. Hence, we positioned the Fund to avoid sectors that were more heavily affected. This worked well as the underweight to Telcos contributed positively to performance. While the rising interest rate environment throughout 2018 was a concern for REITs, those companies with better growth prospects continued to do well, and stock selection within the sector contributed positively as well.

M: What is your outlook for 2019 specific to the markets you cover, and how are you positioned to take advantage of opportunities and/or mitigate potential risks? How have financial market risks, such as the ongoing trade war between the United States and China and tightening monetary policies in major economies, impacted your recent investment decisions? What are some underreported risks that could surface in 2019 or beyond?

S: The biggest change in recent months has been in market expectations for financial liquidity conditions in the future. Financial markets have found some relief with perceptions that most Central Bank policies have shifted towards a more supportive stance for asset valuations. While we have seen policy stimulus from China and certain other central banks, the validation of market expectations will also rest on US Federal Reserve actions that demonstrate the extent of their shift to a more “accommodative stance”. This could be one source of potential volatility for markets.

At the time of writing (early March 2019), markets are awaiting a more definitive resolution of the trade impasse between US and China. It is also becoming clear that the issues between the super powers transcend trade. For export-oriented countries such as Singapore with a high reliance on trade, this implies that there will be more macro headwinds if the global impasse continues to roil on. This could manifest as further weakening of earnings momentum if no clear resolution is reached soon. While most Singapore companies are not directly affected by trade and tariff issues, some may be indirectly impacted by second-round effects, and we remain vigilant for signs that could portend a deeper macro slowdown. Official GDP forecasts have already revised down* from 3.3% growth in 2018 to 2.5% or lower for 2019.

That said, there remain pockets of growth as companies with resilient business models are likely to weather the storm better, and we will seek to selectively add to these companies where we see medium term earnings growth.

*quoted on 28 Feb 2019

M: 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?

S: We have a wide investment footprint across the region to support our fundamental bottom-up investment approach. Our analysts and fund managers work closely together in team-based approach where each has their distinct responsibilities. Our career analysts are organized by sector for financials and cyclicals, and by country for other sectors. 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 and conviction, as well as collaboratively seek out new investment ideas.

While there have been no changes to the investment team based in Singapore, we have been making enhancements to our research resources in the Greater China region to reflect the evolving Asian equity market dynamics.

M: Where do you feel that the investment team or the investment process can be improved upon in the future?

S: The ramifications of digital disruption for many industries are an area that our analysts are focused on. We have also been enhancing valuation toolsets as well as seeking additional perspectives to complement our bottom-up fundamental research, for example through the use of data scientists and big data.

View all Morningstar Singapore Fund Awards 2019 articles here.