This fund's composition often bears little resemblance to that of the FTSE All Share index or its typical peer in the UK Large Cap Blend Equity category. This is because the 20-strong pan European equities team, led by experienced manager Yoon-Chou Chong, follows a disciplined and proven investment process but pays little attention to the benchmark. The team selects companies with attractive valuations as measured by cash flow and earnings, as well as management quality and balance sheet strength.
The focus on quality and valuation renders the team unwilling to pay to
o much for growth or chase momentum, and causes the fund to lag its typical Morningstar UK Large-Cap Blend peer amid frothy market conditions such as those of 2007, when the mining rally helped relegate the fund to a sub par return. It can also lead Chong and his group to invest early in out of favour areas, as was the case with property related companies late last year. Part and parcel of this conviction-based investing is a relatively long investment horizon of 3-5 years, as an early move into high-quality-but-depressed stocks takes time to come good. Sound research is key and so is meeting the company management.
Unsurprisingly the fund's current exposure to consumer discretionary and consumer staples companies, which have been de-rated on account of growing consumer weakness, is among the highest in the peer group. Similarly, the weight of the hottest sectors such as industrials and energy is among the lowest. Other examples of the team’s valuation-conscious strategy: Rio Tinto, a long-time holding and a star performer, is being pared on the grounds of stretched valuations, and an early move was made into the unloved and decimated homebuilder, Barratt Homes.
Given this value conscious approach, the fund's performance can vary appreciably from its Morningstar UK Large-Cap Blend peers, especially when sentiment drives market returns. Over the longer term (three and five years), however, the team's fine stock selection has surmounted the detrimental impact of energy and materials' underweight and consumer related sectors' overweight to beat its UK Large-Cap Blend peers.
We like the fund's disciplined approach--indeed we would be more concerned had Chong and his team chucked their strategy to chase commodities in 2007 than we are with the fund's underperformance on the year. We also think the firm has done a good job of building a solid research staff around the process. One potential concern is the firm's incentive structure, which does not directly link manager pay to performance. Although Aberdeen's subjective system is not uncommon in the City, we believe incentive pay that emphasises long-term performance helps more clearly align managers' interests with those of fund owners.
Even so, we think this is a strong choice for long-term exposure to UK equities. The fund's value bias can result in periods of disappointing returns but it is possible to counter that by blending the Aberdeen fund with a growth-orientated UK equities fund from another group to produce a smoother overall return.
