Source: Schroders
For any listed company and its IRO, knowing who the investors are, their investment strategies and styles are crucial for investors targeting or preparing for an effective investor meeting. In this volume of Inside Investor Relations, we continue to take a closer look at some of the major foreign institutional investors that have been investing in Taiwan.
Schroders plc is a British multinational asset management company trading on the London Stock Exchange (LSE: SDR). With a history of more than 200 years, Schroders has offices in 37 different locations across Europe, the Americas, Asia, and the Middle East, and has over 5,000 employees globally. Asset under management at Schroders totaled US$649.6 billion as of June 30, 2020. In Taiwan, Schroders is also one of top 20 foreign institutional investors. Schroders was founded in 1804 by Johann Heinrich Schröder, who operated a trading company specializing in sugar which diversified into trade finance. With the help of his eldest son, Johann Heinrich Wilhelm, the company steadily built up the trade finance arm and developed bond trading business.
In 19th century, Schroders issued bond to the Confederates during the Civil War, also introduced the Japanese government’s first foreign loan to the London market to finance railway construction. Schroders had grown to become one of London’s leading issuers for foreign loans. In 20th century, Schroders formed its first investment trust and set up its first investment management department. Since the sale of the investment banking arm to Citigroup in 2000, Schroders has focused completely on asset management.
Schroders established a representative office in Taiwan in 1989 to help Taiwanese companies issue ECB and GDR. In 1991, the year when Qualified Foreign Institutional Investor (QFII) was permitted to directly invest in Taiwan’s stock market, Schroders was one of the largest foreign institutional investors. In 2008, Schroders continued its expansion in Taiwan, it acquired E.Sun Investment Trust and renamed to Schroders Investment Trust.
Schroders’ Investment Philosophy
According to Schroders’ corporate website, Schroders believes that companies with sustainable competitive advantages, quality growth, and reasonable price can deliver better long-term return. Using proprietary fundamental and sustainability research, they state that their strategy seeks to invest in stocks that are expected to deliver forward earnings growth ahead of the market’s expectations; in other words, stocks with a positive “growth gap”.
They believe material differences between underlying company fundamentals and market estimates exist due to three persistent inefficiencies:
• Markets overreacting to short-term news flow
• Markets extrapolating historic growth and failing to correctly interpret catalysts that change the trajectory of growth
• Markets failing to look far enough ahead when appraising the earnings power of companies
Schroders states that the teams try and exploit these inefficiencies by focusing on finding those quality growth companies with a sustainable competitive advantage that are mispriced by the market.
Investment Process
In order the construct the best investment portfolios, Schroders’ investment process can be summarized into three steps:
Source: Schroders International Equity Strategy Overview
Idea generation: Initial fundamental and macroeconomic research are conducted by local analysts and combining quantitative screening techniques. Each company is then graded on a scale of 1 to 4 for relative local market strength. The GSS (Global Sector Specialists) team focus on stocks ranked 1 or 2 by the local analysts. They evaluate the company’s strength relative to global sector dynamics.
Stock selection: Then the team identifies companies where the forward earnings growth is not yet identified by the market. The GSSs build detailed earnings and cashflow models and conduct meetings with company management to develop their investment thesis and devise an earnings roadmap for each stock. The GSSs produce a fundamental risk score for all of the companies researched. This framework scores companies for operational, financial and geopolitical risk, as well as incorporating ESG factors into analysis.
Portfolio construction and risk control: Using the ideas generated by the GSSs, portfolio construction is undertaken by our Portfolio Managers. The risk-adjusted return expectations, conviction level and relative upside determine the position size of each stock. Stocks with a higher relative upside, lower fundamental risk profile and higher liquidity will receive higher active weights in the portfolio.
ESG Integration
Schroders has been incorporating ESG considerations into their fundamental research and security selection process for more than 20 years. In 2019 Schroders publicly announced their previously internal commitment to integrate ESG across all assets they manage by the end of 2020. As of June 30, 2020, over 80% of their AUM is ESG integrated according to Schroders’ communications.
Schroders’ central Sustainable Investment team, which includes 22 professionals, are responsible for supporting ESG integration efforts through the production of region and sector focused research and developing proprietary tools. Their analysts and fund managers work closely with the Sustainable Investment team to identify, understand and manage ESG risks.
In Schroders 2018 sustainable investment report, they state that governance is where they place primary weight in their assessments although they point out that they do not seek to minimize the importance of social and environmental factors. They explain that there are certain governance factors that they will always consider, such as how management are incentivized, which is important when developing an understanding of the business and its objectives. Ultimately, their specialists want to ensure that management can be trusted and will efficiently allocate capital, that key stakeholders are identified, and ownership and interests can be determined.
Stewardship
At Schroders, they believe that they are owners – rather than renters – of capital. Effective and responsible active ownership has long been part of their fundamental approach to investment. Schroders actively exercise voting powers and engage on issues such as strategy, risk, performance, and governance. The overriding principle governing approach to voting is to act in the best interests of shareholders. Where proposals are not consistent with the interests of shareholders, they are not afraid to vote against resolutions.
In 2019, Schroders’ sustainable investment report discusses how the firm was involved in a range of stewardship activities across the world. Take the Asia Pacific region as an example, Schroders’ votes against management increased from 2018 – driven predominantly by concerns over independence, attendance and overboarding. They do not consider the number of directors’ board seats to qualify as a measure of director effectiveness.
Schroders’ Exposure in Taiwan
According to our research, as of October 31,2020, Schroders has invested in 211 listed companies in Taiwan, with a total investment of more than US$7.0 billion. The top five Taiwan-listed companies with the highest investment value are TSMC, MediaTek, Hon Hai, Delta, and Novatek. Among them, there are some companies such as Novatek, Chroma Ate, Getac, etc., for all above companies, Schroders is the largest foreign institutional shareholder.
Source: QIC Research
Schroders’ investment team, other than the Taiwan local team, that has a direct investment responsibility in Taiwan is mainly based in UK (Global Small-Caps, Emerging Markets, Asia), Hong Kong (Asia, Emerging Asia, Greater China, Taiwan), Singapore (Emerging Markets, Asia).
Source: QIC Research
Among all Schroders’ funds, Schroder International Selection Fund Taiwanese Equity is one of the funds that holds the largest numbers of Taiwanese equities. This US$289mn AUM fund has Taiwan Semiconductor (2330 TT) as its largest holding (9.7%) as of Oct 31, 2020, and has total 46 Taiwanese companies.
Source: Schroders, as of October 31, 2020
Schroders believes that Taiwan is a defensive market within the globally low interest rate environment, and its high dividend yield should continue to support the overall market. In the long term, they continue to maintain their bottom-up stock-selection approach and valuation discipline, with a focus on companies demonstrating global competitiveness, professional management and strong cashflows.
QIC advisors consist of experienced professionals that have worked in major sell-side and buy-side companies. Leveraging our knowledge in industries and relationships with investors, we assist companies and investors to achieve effective two-way communication to enhance shareholder value. QIC also supports our clients with our many years of experience in corporate access services. We plan, schedule and execute tailor-made roadshows and targeted investor events for high-quality corporate clients. If you are interested in learning more about Schroders or our services, you are welcome to contact us.
Contact: yvonnehuang@qtumic.com