Two stock-picking strategies compared

Wealth manager St James's Place (SJP) has changed the external manager on its £1.3bn St James's Place Far East fund, switching from the Aberdeen Asset Management team headed by Hugh Young to Alistair Thompson and Martin Lau of rival fund house First State Stewart Asia. The change, which will happen in the fourth quarter of this year, is a further blow for Aberdeen, which has suffered 13 consecutive quarters of investor outflows.

Both Aberdeen and First State Stewart have long been two of the leading UK specialists in Asian and emerging-market equities, with strong track records. However, their fortunes has diverged in recent years: First State Stewart has gone from strength to strength, while many of Aberdeen's funds have struggled. For example, over the past three years First State Stewart's Asian Equity Plus fund has returned 16% over three years, while Aberdeen's Asia Pacific Equity fund has lost 6.6%.

So why have the two fund houses begun performing very differently, given that there are considerable similarities between their approaches? Both follow a "bottom-up" stock-picking approach, meaning that they focus on analysing individual stocks rather than picking investments based on macroeconomic data and market cycles. Both also focus on higher-quality companies.

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One difference is that First State Stewart looks for companies trading on reasonable valuations that should be able to deliver sustainable growth, while Aberdeen places a far greater focus on outright valuation, says Wing Chan of funds research provider Morningstar.

In recent years, "a heavier emphasis on quality, growth and earnings certainly tended to yield better results in this challenging growth environment", which has benefited First State Stewart. It is also worth noting that Asian Equity Plus places a greater focus on dividend stocks, which have been more favoured by investors in recent years.

Aberdeen's strategy of gaining much of its Chinese exposure via Hong Kong-listed stocks has not worked well for them in recent years, says Chan. First State has been relatively more successful in individual stock picks within their China allocation.

Differences in geographic and sector allocations also help explain the divergence. Both fund managers were more heavily invested in India than many peers, but First State Stewart had a larger weighting.

India accounts for around 7% of holdings among funds in their category, but the Aberdeen Asia Pacific fund has had an average of 12.4% of its assets in the country over the past three years and the First State Asian Equity Plus fund has averaged 21.1%. Given that the Indian market has performed strongly up by more than 40% over three years this large allocation to India has helped First State.

Sector-wise, defensive sectors such as consumer staples and health care have been in favour recently, and 34% of the First State fund has been invested in these on average. Aberdeen has had a much lower allocation, at under 10%.

All these factors help to explain why two managers that were both previously seen as safe picks in Asian equities have delivered such different results for investors in recent years. The impact of individual stock-picking decisions can often be swamped by other factors such as country exposure especially in regional funds such as these, where there can be major differences in the performance of different countries and investor's enthusiasm for specific types of stocks such as those with high dividends.

Whether First State's strategies will continue to do better or whether Aberdeen will rebound remains to be seen, but the recent divergence between the two is a good example of how judging funds purely on past performance can be misleading.