• An unconstrained equity fund does not have to adhere to benchmarks and have the flexibility to pursue opportunities across the entire investment universe
• Fullerton Asia Absolute Alpha Equity has an absolute target return of 8% p.a. over three to five years irrespective of market conditions
• The fund has outperformed its peers in a significant way since the fund’s new portfolio managers took over in 2018
• The fund is able to swiftly adapt to structural changes in the market given its unconstrained mandate, an attribute we believe has aided in its performance
•  Cash is held as a residual asset; the fund manager is not compelled to fully invest the funds when there are no good opportunities out in the market

Fund managers are often constrained by what they can invest. They have to adhere to a particular benchmark and their performances are often measured against them. One benefit of such strategies is that there is limited room for the fund manager to underperform, since they can only deviate slightly from the benchmark.

But this also means such funds will not be able to take advantage of paradigm shifts in markets in a timely manner, as what we have observed over the past year. In this article, we will focus on the domain of unconstrained equity funds, and one fund in particular, the Fullerton Lux Funds - Asia Absolute Alpha A Acc SGD, and explore how and why it deserves investors’ attention.

What is an unconstrained equity fund?

Unconstrained equity funds, like its label suggests, does not have to adhere to benchmarks. They have the flexibility to pursue investment opportunities across various segments of the market they are focused on. For an equity strategy, this means that their sector allocation may differ significantly from a benchmark, and therefore may produce significantly different returns from an index or ETF.

One common trait of unconstrained equity funds is their absolute return targets. Fullerton Lux Funds - Asia Absolute Alpha A Acc SGD aims to return investors 8% p.a. across a market cycle, irrespective of market conditions. This means that the fund’s performance should be appraised over a period of time (i.e. 3 to 5 years) rather than on a calendar year basis.

Another aspect such funds have is their ability to move into cash as a residual asset class, meaning the fund manager does not have to invest if they believe there isn’t any compelling opportunity out there in the market. In this case, cash becomes a tool to limit downside risks.

What is the fund’s investment philosophy?

Fullerton Lux Funds - Asia Absolute Alpha A Acc SGD is co-managed by Ken Goh and Brian Wee. Both managers took over the reigns in managing the portfolio since end 2018 and have decades worth of experience in investing within the Asian equity space.

The fund’s aim is to generate long term positive returns via actively investing in growth stocks. The fund invests in four types of growth companies; Cyclical Growth, Structural Growth, Defensive Growth, and Quality Growth. Depending on where we are at in the market cycle, different type of companies will experience varying degrees of changes in earnings growth, which the fund seeks to position for ahead of the crowd.

The fund also believes in investing sustainably in accordance to ESG principles. They employ a third party ESG provider, Sustainalytics, to assess ESG risks that are material to the companies the fund invests in. Overall, the ESG ratings are integrated with the team’s investment process, which would affect the underlying stock position limits within the portfolio. The investment team, however, may dispute the third party’s ESG assessment at their own discretion.

The team assesses material ESG risks that may influence the risk profile and earnings potential of companies they invest in. While ESG is still in a relatively nascent stage of development in Asia (relative to Western developed markets), having such a framework can help the team flag out any potential risks outside of traditional investment evaluation.

What makes this fund stands out?

When it comes to investing in actively managed strategies, performance is always key.  Let’s consider Fullerton Lux Funds - Asia Absolute Alpha A Acc SGD’s performance since Ken & Brian took over the reins of Fullerton Lux Funds - Asia Absolute Alpha A Acc SGD.

As seen from Chart 1, the indexed performance of the fund against some of the popular equity strategies across Asia & Asia Pacific (excluding Japan) on our platform have been encouraging. Much of the fund’s outperformance came following the equity meltdown in March 2020, as it was able to quickly take advantage of new growth opportunities that arose from structural changes in a post COVID environment.

Chart 1: Indexed return since end December 2018

The fund’s 6 month rolling returns, which gives us an idea of its performance over time, also corroborates the above point. Since March 2020, the fund’s performance (as denoted in black) has hovered consistently above most of its peers.

Chart 2: Rolling 6 month returns since end December 2018

Significant difference in the fund’s returns against the MSCI AC Asia ex Japan benchmark, could be attributed to its agnosticism towards the index. Unlike the index which tracks the performance of thousands of Asian equities, the fund only invests in the investment team’s highest conviction ideas of 20 to 30+ stocks.

Its outperformance for much of 2021 may be attributed to its high conviction investments into tech related companies which have been winners coming out of the pandemic. Over the last three months, however, performance of the fund has been lackluster.

Figure 1: Fund is an underperformer on a three year time frame given its exposure to the Growth factor and Asian tech stocks

Source: iFAST

Data as of May 18 2021

We believe macro developments that our team have covered in the past weeks, such as the rotation from Growth to Value, and regulatory crackdown on the technology sector by the Chinese government, have affected the fund’s performance.

(See: Value is making a comeback. Can the long-awaited rally sustain?)

(See: Recent correction an opportunity to scoop up more shares of Chinese tech companies)

Nevertheless, we believe the long term growth stories of the fund’s underlying investments in consumer and tech-related sectors remain intact, and they remain positioned to benefit from structural demand drivers stemming from rapidly unfolding megatrends in Asia.

Does the fund’s approach equate to higher volatility?

Not necessarily. While a high portfolio concentration tends to raise eyebrows when it comes to risk management, we observe that the fund’s maximum drawdown and volatility metrics are not in any way riskier than its peers or benchmark.

Chart 3: Fund 3Y maximum drawdown versus peers

Chart 4: Fund 3Y volatility versus peers

 [All performance data is in SGD & Total returns (gross dividend) terms unless otherwise stated]