He said the Schroder ISF Hong Kong Equity Fund invested in companies with a high level of earnings visibility and those with a commitment to growing shareholder value over time. Such companies generated returns on invested capital greater than their weighted average cost of capital, as well as companies with 'quality' attributes.

'We believe these companies will outperform their peers over the medium to long term,' Mr MacKenzie said.

The fund avoids companies that trade at low multiples due to the poor quality of their operations.

At certain points in the cycle, such as strong economic growth and inflation pressure, these companies may find some pricing power returns, and this may result in subsequent share price performance. However, Mr MacKenzie said the core of the firm's investment philosophy ensured that it invested in high-quality stocks.

'As an active manager we believe in the potential to gain a competitive advantage from original research, which we translate into superior investment performance through disciplined portfolio construction,' Mr MacKenzie said.

The Schroders investment team exploits market inefficiencies through the application of extensive, rigorous proprietary research aimed at identifying underpriced opportunities. Schroders believes that equity markets are not fully efficient.

'We believe that in the long term, the inherent value of companies will be recognised by the market, thus eliminating this 'mispricing' and enabling Schroders to deliver superior returns,' he said.

Valuations for Hong Kong domestic companies look fair to mildly expensive. The economy continues to grow well, but loan demand is slow, tourism is flat and office demand outside financial services is sluggish.

'The key drivers of corporate profitability in Hong Kong are anaemic,' said Mr MacKenzie. However, the dividend yield of many of the domestic companies is reasonable.

Mr MacKenzie said one of the company's strengths was the depth of its local investment research resources.

The Hong Kong equity research capability comprises a team of 11 experienced equity analysts providing in-depth stock coverage. Each year, the team conducts more than 300 company visits.

'We believe that this is a crucial part of the investment process to gain a valuable insight into companies and their key issues,' said Mr MacKenzie.

He said over the past five years, the Schroder ISF Hong Kong Equity Fund performance had been significantly ahead of the benchmark. The outperformance had primarily come from positive bottom-up stock selection. The performance had also benefited from many of the fund's mid-cap names, which had outperformed over the period.

'Our exposure in selected exporters and industrial stocks, which benefited from better-than-expected United States economic figures and the weaker US dollar, has made positive contributions to performance in the first part of the period under review for the Fund Awards. In the second half of the period, we switched to Hong Kong domestic stocks to capture the improving economy following the crises caused by the outbreak of severe acute respiratory syndrome,' Mr MacKenzie said.

The fund performance gained from its consistently underweight position in property developers while maintaining overweight positions in selective Hong Kong conglomerates, shipping/port companies and property investors, which were the key beneficiaries of the recovery in retail and office property markets following Sars.

Mr MacKenzie said as Hong Kong and the mainland economies became more intertwined, positive contribution had also come from the fund's exposure to China-related stocks. The portfolio is overweight in mainland insurance companies and consumer stocks.

Performance of mainland insurance companies had been boosted by good earnings results, solid demand and expanding margins, while the consumer sector had benefited from strong consumer spending in China.

In future, Mr MacKenzie said the Schroder ISF Hong Kong Equity Fund looked set to retain a large overweight position in consumer and financial stocks, which in many cases offered attractive yields and steady, if unspectacular, long-term earnings prospects.

'We are underweight in the industrial sector and material sectors due to worries about the US consumer situation and in the case of many industrials, the margin pressure resulting from cost pressures from the ongoing build-out of industrial capacity in China,' Mr MacKenzie said.

The fund is also underweight in the utility and the telecommunications sectors.

He believed that utilities were relatively aggressively valued, given the muted growth prospects and forthcoming regulatory review.

'In most sectors in China we are struggling to find any bottom-up value,' Mr MacKenzie said. Therefore, the firm maintains its long-term cautious stance on Chinese banks because of expensive valuations, questionable balance sheets and a history of disastrous lending policies.

For the telecommunications sector, Schroders remains underweight.

Mr MacKenzie said mainland oil stocks traded on more

sensible profits earnings, but relative to other international oil stocks they looked expensive and were clearly vulnerable to falling oil prices.

As a fundamental investor, Schroders would remain cautious by focusing on selected infrastructure, consumer and energy names, where the firm's analysts can make sense of the valuations.