Morningstar

Veritas Asian A EUR Acc

Analyst Report
Morningstar's Take
|12/04/2024
by Lena Tsymbaluk
Veritas Asian benefits from a seasoned manager, a stable and experienced supporting team and a differentiated approach. It remains a strong option for those seeking exposure to quality-growth investing in Asian equities. However, we have concerns about the portfolio’s recent concentration, which can potentially affect the risk/reward profile of the strategy. As a result, the Process Pillar rating has been downgraded to Above Average from High, while the People Pillar rating has been retained at High.

Ezra Sun has been successfully managing Asian portfolios for 25 years. He has managed Veritas Asian since Oct 2004 and ran Newton’s Asian equity portfolios for five years before that with broadly the same thematic approach.

The manager is aided by three analysts, each of whom has been with the team for more than a decade and has at least 20 years of industry experience. The team is relatively small compared with some other Asian strategies we rate but suits this thematic approach as Sun invests only in preferred sectors and themes.

Xiaoyu Liu joined the team in July 2022; she is relatively senior with 15 years of experience in Asian equities and has a background in environmental, social, and governance investing. She came from Aviva where she managed Pan-Asian portfolios for eight years. This is a long-term succession plan for Sun, although there are no near-term plans to retire. Liu became co-portfolio manager on the China strategy in November 2022, although Sun remains the final decision maker.

The approach combines top-down thematic views and bottom-up stock selection within those themes. The manager seeks quality companies, which he defines as those generating material free cash flow, with high barriers to entry and predictable capital management. Sun invests in companies that can achieve his internal rate of return objective of 15% per year based on a five-year holding period. This way of thinking results in a high leaning to growth companies.

Historically, the portfolio has consisted of 35-55 holdings (even 70 holdings prior to 2014). However, more recently, it has been concentrated into 30 stocks (as of March 2024). The top-10 holdings concentration has also hit its highest record at 60%, with punchy positions in Alibaba (9.6% as of March 2024), Taiwan Semiconductor Manufacturing (9.9%), Samsung Electronics (7.3%), and Tencent (6.6%). While the changes could be positive, this could also potentially shift the risk/reward profile of the strategy and amplify the impact of individual blowups.

The strategy has had a challenging couple of years, mainly 2022 and 2023, which has negatively affected the three-year record. This in part owes to the strategy’s growth style being out of favor as value-related areas such as energy, financials, and utilities, which the team believes don’t possess the quality characteristics they seek, outperformed. Moreover, the strategy has been hit by a consistent overweighting in China (averaging 33% in 2023 versus 29% in the MSCI All Country Asia Pacific ex Japan index), with a lot of names derating on economic slowdown such as Alibaba, Meituan, JD.com, and Yum China.

The manager has made a few changes to the portfolio in the past six months. Sun has reduced China’s absolute exposure, which was 26% as of March 2024, roughly in line with the MSCI AC Asia Pacific ex Japan index. At the same time, he has also increased technology exposure, which was 31% of the portfolio in March 2024, through adding to TSMC, Samsung Electronics, Infosys, and Tata Consultancy and initiating positions in SK Hynix, Samsung SDI, and Unimicron Technology.

While there can be periods of underperformance given the unconstrained nature and high-conviction portfolio, long-term performance over the manager’s tenure remains solid.
 
Morningstar Medalist Rating™A strong option, although investors should be aware of the strategy’s unconstrained nature and a compact portfolio.
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Morningstar Pillars
PeopleHigh
ParentAbove Average
ProcessAbove Average
 
Morningstar Medalist RatingMorningstar assigns the Medalist Rating to funds that are qualitatively and quantitatively assessed through manager research and algorithmic processes. The assessment turns on three key “pillars” – People, Process, and Parent – that yield an estimate of how well a fund will perform before fees but after adjusting for risk.
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