Schroder Small Cap Discovery: April 2020 fund update

Kate Marshall | Thu 30 April 2020

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• This fund offers a different way to invest in Asian and emerging economies
• We rate Matthew Dobbs highly for his experience and track record of investing in Asia
• He has the support of a robust team of analysts based across the region to sift through the market and uncover some of the most exciting opportunities

How it fits in a portfolio

This fund invests in smaller businesses that are based in Asian and emerging markets, or make most of their money in these areas. Smaller and more innovative businesses offer lots of growth potential, but they're higher-risk because they're at an earlier stage of their development. The fund could therefore be used in a portfolio that's able to accept more volatility in search of higher potential long-term returns. We think it could fit well with Asian and emerging markets funds focused on larger firms, but should only form a smaller part of an investment portfolio.

Manager

Matthew Dobbs has been the lead manager of this fund since its launch in 2012. He has plenty of experience investing in Asian and emerging markets and has researched eastern markets for three decades. He's also run other funds that invest in Asian companies of all sizes, including larger firms, since 1995. This includes a fund that focuses specifically on the Asia Pacific region and an investment trust.

There are thousands of companies in this part of the market, so Dobbs has the help of co-manager Richard Sennitt and a robust team of 37 analysts based across Asia. They help him sift through the market and uncover what they believe to be the most promising opportunities. We think Dobbs is knowledgeable and skilled enough to make decisions in his own right, but it's encouraging that he works closely with Schroders' wider group of analysts and receives ideas and insight from them. We believe he is passionate about fund management and cares about investor outcomes.

Process

Smaller companies tend to go overlooked by many investors. Yet many offer lots of growth potential, often because they're using new technologies or developing exciting new and innovative products. The manager takes this as an opportunity to spot those with exciting potential before they're noticed by other investors.

Dobbs works closely with Schroders' Asian and smaller companies teams to help generate research and ideas for the fund. They look for companies with good cash flows, strong franchises, a quality management team, superior corporate governance standards and a strong business model that's able to defend against competition. Next they aim to forecast the earnings of each business, which could ultimately influence the direction of the share price.

The manager is prepared to be patient. He invests in companies for the long term and as they start to grow into larger firms. He thinks lots of developing economies will switch from being export-led to focusing on domestic consumption, so the fund's invested to make the most of this change. Industries that could benefit from greater consumer spending therefore make up most of the fund. He's also currently focused on Asian countries that he thinks are more stable, including Hong Kong, India and Taiwan, though other high-risk emerging countries, such as Brazil and Peru, feature in the fund.

Culture

Schroders is a well-established asset manager with offices based all over the world. It believes the importance of Asian and emerging markets in the global economy has increased significantly over the years, and expects this to continue. We think Schroders is dedicated to investing in this part of the world and supporting the teams that invest there.

Dobbs is currently based in London, though he has spent some time living in Asia too. He's spent his entire investing career at Schroders since 1981 and we think he is loyal to both his funds and other team members. He has built a good franchise of Asian and emerging markets funds at Schroders and enjoys making good returns for investors. We also view it as a good thing that the manager's incentivisation is focused on longer-term performance.

Cost

This fund is available at an annual ongoing fund charge of 0.71%, after a 0.26% discount available through the HL platform. This makes it one of the cheapest actively managed funds in the Asian and Global Emerging Markets sector available through HL. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Dobbs has an excellent long-term track record. His other Asia Pacific funds, the first of which he started running in 1995, have performed much better than the broader Asian market.

Schroder Small Cap Discovery has also outperformed the broader emerging stock market since its launch in 2012. It hasn't done quite as well as the market over the past few years though, partly because small and medium-sized companies haven't performed as well as larger firms. Smaller businesses don't tend to hold up as well as larger and more stable firms when market conditions are weaker, and we've seen this so far this year during the coronavirus outbreak.

The manager also has a slightly more value-oriented approach, with a focus on some of the more economically sensitive areas of the market, which hasn't helped. We think he has the skills and experience to drive long-term returns for investors. There are no guarantees though, and past performance isn't a guide to future returns.

Over the longer term, our analysis shows the manager's performance has been boosted by individual stock picking, rather than trying to position the fund towards the right sectors. It also shows the fund's allocation to certain countries has helped. Dobbs takes a fairly conservative approach to investing in this higher-risk part of the market, which means the fund hasn't tended to fall as far when the market drops.

Past performance is not a guide to the future. Source: Lipper IM to 31/03/2020.

Find out more about this fund including charges

Key investor information