Fidelity vs Value Partners dividend strategies

Head-to-Head puts equity income strategies from Fidelity Investments and Value Partners against each other.

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In the low yield environment, investors have been chasing equity income products and the hunt for such funds is expected to continue.

Against this backdrop, we take a look at the Fidelity Asia Pacific Dividend fund and the Value Partners High Dividend Stocks vehicle, which have considerably long track records.

Fidelity’s Luxembourg-domiciled fund has been in operation since 2004 and had $347m in assets under management on 31 January. The Cayman Island-based Value Partners High Dividend Stocks was launched in 2002 and had nearly $3bn in AUM on 31 January.

The Fidelity fund focuses on investing in stocks in the Asia-Pacific region with a stable dividend yield and which have the potential for strong dividend growth.

On the other hand, the Value Partners fund invests in high-yielding equities and debt securities in Asia-Pacific, but with a focus on Greater China. The fund also has the flexibility to invest in other asset classes such as gold and real estate investment trusts.

Another differentiating factor lies in the investment approach.

The Fidelity fund has a balanced approach toward growth and value stocks while the Value Partners fund has a strong focus on value investing, said Luke Ng, vice president at FE, who provides a comparative analysis.

Investment strategy review

Polly Kwan, the fund manager for the Fidelity fund, primarily adopts a bottom-up approach and pays strong attention to the free cash flow of companies.

According to Ng, Kwan prefers to invest in stocks that are paying a higher dividend per share than the market average, or companies with stable dividends along with good earnings and dividend growth prospects.

Furthermore, the manager does not hesitate to invest in companies with low payouts, as she sees a potential for such companies to emerge as market leaders over the next three-to-five years and offer steady dividend pay-outs.

The Fidelity fund is overweight China compared to its benchmark index, the MSCI AC Asia-Pacific ex- Japan. Australia is the next top country allocation.

“The Fidelity fund manager favors the banking sector in these two countries due to good dividend policies and stable dividends,” Ng said.

The Value Partners fund has a higher exposure toward China and Hong Kong. Furthermore, the Value Partners fund has about 5% of capital deployed in bonds.

A sharp difference between the two is that the Fidelity fund has a majority of its holdings in large-cap companies, while the Value Partners fund has a higher allocation to small- and mid-cap stocks, he noted.

“In general, there is more balance between value and growth stocks in the Fidelity fund’s portfolio.  The valuation and dividend yield of the fund is in-line with that of the benchmark, but much higher compared to the earnings growth.”

According to Ng, the P/E and the dividend yield of the Fidelity fund is close to benchmark index’s 13.7x and 2.9%, respectively.

On the other hand, the valuation of the Value Partners fund is very low (P/E is about 8.4x), and dividend yield is much higher (4.8%).

A snapshot of portfolio allocation:

 Particulars

 Fidelity

 Value Partners

 Top geographies

 China           26.4%

 Australia      22.1%

 Taiwan         12.7%

 Hong Kong  11.4%

 H-shares           23%

 Hong Kong       21%

 South Korea     16%

 China A shares  9%

 Top stock picks

 Commonwealth Bank Australia      4.9%

 ANZ Banking Group                       3.7%

 Taiwan Semiconductor                    3.3%

 Bank of China                  4.7%

 China Construction Bank 4.0%

 China Vanke                    3.1%

 Top sectors

 Financials                         39.7%

 Information Technology  12.4%

 Industrials                         8.5%

 Consumer discretionary  18%

 Banks                              17%

 Real estate                      15%


Performance review

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The Fidelity fund underperformed the Value Partners fund over six-months and over one-, three- , five- and ten-year periods to 28 February. Both funds outperformed their benchmarks over those periods.

The Fidelity fund registered 8.8%, 8.3%, 8.6% and 7.9% returns respectively over one-, three-, five- and ten-year horizon.

The Value Partners fund recorded 14.7%, 10.4%, 11.2% and 12.8% returns, respectively during the same periods.

“The Value Partners fund seems to have benefited from the rally in Hong Kong and China stocks in 2014,” Ng added.

In terms of calendar year performance, the Fidelity fund ended 2014 with a 3.5% return compared to a 9.4% return for the Value Partners fund.

According to FE Analytics, in 2013, the performance was more or less similar for both funds. The Fidelity fund notched up an 8% return while the Value Partners vehicle offered an 8.1% return.

In 2011, both products ended in negative territory, but the fall was less for the Value Partners product. The Fidelity fund gave a negative 14.8% return while the Value Partners product registered a negative 11.9% return.

The Fidelity fund has an FE Crown Rating of 3 while the Value Partners fund enjoys an FE Crown Rating of 5 (The FE Crown ranks funds based on alpha, consistency and volatility).

“The volatility of the Fidelity fund is much higher than the Value Partners vehicle,” Ng said. “With lower volatility and higher returns, the Value Partners fund delivered better risk-adjusted returns over the past three years.”

Manager review

Polly Kwan has been managing the Fidelity fund since February 2006. Kwan joined Fidelity in 2000 as an investment analyst in Japan. In 2004, she moved to Hong Kong and joined the global property research team.

According to FE Analytics, Kwan also managed the Fidelity Asia Pacific Property fund from February 2007 to January 2014.

She is backed by a sizeable research team of around 54 analysts in the region, Ng said.

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Value Partners does not name individual fund mangers. It adopts a team approach for portfolio management.

“The investment team of Value Partners is not as sizeable as that of Fidelity, but the team does on-the-ground work, including company visits and research meetings. The team is not afraid to make contrarian bets.”

Fees

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The Fidelity fund charges annual management fees of 1.5% compared to 1.25% for the Value Partners vehicle.

”The annual management fees and total expense ratio for the Fidelity fund is higher than that of the Value Partners fund, but investors should be aware that the Value Partners fund levies a performance fee.”

The Value Partners fund levies a 15% performance fee, which is calculated annually on a high-on-high basis.

“This means Value Partners is only entitled to the fee when the fund consistently performs better than its historical high in terms of net asset value per unit.

“Someone may argue that the performance fee could drive the fund manager to take on higher risk or make speculative bets, but the Value Partners team has demonstrated consistency with the strategy and methodology that they believe in,” Ng added.

The ongoing charges or the total expense ratio for the Fidelity fund was 1.96% on 30 April 2014. For the Value Partners fund, the TER was 1.8% (exclusive of performance fees) for the period ended 30 June 2014. The TER inclusive of performance fees stood at 3.21%

Conclusion

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“The Fidelity fund consists of companies with stable income and dividend growth potential, and is more likely to move in-line with the market.” Ng said.
It is well-suited for investors who expect a pay-off from both income and growth.
“The Value Partners fund also invests in both types of companies, but tends to bias toward those with low valuations and higher dividends,”  Ng said.
“Given these characteristics, the Value Partners fund offers better income streams and protection from the downside. As shown in the track record, the fund often delivers good returns in a [market upturn] as well when true value of its holdings are reasonably reflected.”  Ng pointed out.

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