Taiwan’s stock market has been hot lately. For the past year, in US dollar terms, the MSCI Taiwan Index has returned 25% versus the MSCI Emerging Markets (20%) and MSCI China (13.8%), according to FE data.
Taiwan’s investment appeal lies largely in its strong technology sector, made up of mainly high-end components suppliers and semiconductor manufacturers. The tech companies are key links in the global supply chain for smartphones – in particular Apple’s iPhone — and are therefore susceptible to any slowdown in Apple sales.
Exports, in fact, account for the bulk of Taiwan’s economy.
In addition, political risk comes from China. In May, an independence-minded president was elected and the direction of cross-straits relations are still unclear.
Still, despite the election, volatility has been relatively low. In the last year, Taiwan’s market had 14% volatility versus the EM index with 16.8% and China with 21.5%, FE data shows.
Against this backdrop, Luke Ng, senior vice president of research at FE Advisory Asia, provides a comparative analysis of the JP Morgan Taiwan Fund and the Value Partners Taiwan Fund.
Investment Strategy
JP Morgan Taiwan and Value Partners Taiwan are domiciled in Luxembourg and Cayman Islands, respectively. The former uses the Taiwan Stock Exchange Capitalisation Weighted Stock Index (TAIEX) as the benchmark, and the latter measures against both the TAIEX and MSCI Taiwan, Ng said.
TAIEX is a broader based index which includes all Taiwan listed stocks and is weighted by market cap, while MSCI Taiwan includes 90 constituents and has a core focus on mid- and large-cap companies, he explained.
“However, both JPM and Value Partners funds are not benchmark followers, and both tend to bias toward the mid- and small-cap.”
The JP Morgan fund primarily adopts a bottom-up approach, focusing on high quality companies that present secular growth opportunities, Ng said.
The fund may also invest in stocks with shorter-term, cyclical growth prospects, including opportunities coming from reforms or restructuring issues. But that is not a core part of the portfolio.
“Overall, this is a growth-oriented strategy, with fund managers actively digging into the smaller cap space in an attempt to invest in opportunities at an earlier stage. Due to the market nature of Taiwan, over half of the holdings are among the IT sector.”
However, the portfolio also has exposure to textile companies, which have an advantage in producing high quality clothing that meet the rising demand, and also in the auto parts sector, which is benefitting from the outsourcing trend driven by global automotive companies, he added.
Luke Ng, senior VP of research at FE Advisory Asia
For Value Partners, the investment team tends to follow an in-house process that has a core focus on bottom-up value investing, Ng said.
“Relative to the growth-oriented approach of JPM, the investment mindset of Value Partners is more risk-averse. The team has a strong focus in company research, and follows a disciplined and repeatable process to make buy/sell decisions for the fund.”
The team is also encouraged to take contrarian views and to act against the market in order to add value, he added.
Similar to the JP Morgan product, the Value Partners fund invests half the portfolio into the IT sector. Aside from this, Value Partners has a stronger focus on telecommunication services.
“Worthwhile to note, the fund is sitting at around 10% cash at the moment, and when the investment team took a defensive stance, we could see higher cash levels for the fund,” Ng said. “Q3 in 2015 was an example. The team sat on 20% cash during the quarter. By comparison, the cash level of the JPM fund usually stays below 5%.”
The JPM fund focuses on growth while Value Partners focuses in value. Hence, the JPM portfolio has a higher valuation among the two products, but at the same time, the earnings growth prospects of holdings are also generally higher, Ng explained.
Performance
As of September 27, 2016, Value Partners slightly outperformed JPM over a three-year period.
“This was because JPM had a relatively bad year in 2014, and the market rotation driven by investors did not go well for JPM, especially in Q4,” Ng said.
“On the other hand, the JPM fund recovered well in 2015 despite the down market, outperforming the TAIEX and the Value Partners fund during the year.”
The performance of Value Partners looked particularly strong over a 5-year period thanks to a favourable year in 2012, Ng said.
“The fund paid off well in the year as the team identified some value ideas and oversold names in the IT sector throughout the momentum-driven market, and turned more positive on consumer-related names.”
Ng added that the risk-averse approach of Value Partners helped lower the volatility of the fund. Over three- and five-year periods, annualised volatility of the fund managed to stay within the 13%-14% range. The volatility of the JPM product and Taiwanese equities were around 18% over the same two periods.
In addition, Value Partners’ numbers for other risk indicators such as maximum drawdown and downside risk were also lower than that of the market.
