Investors in Asia-Pacific ex-Japan equities have been well rewarded during 2017 with a gain of just over 32% for the index. The region has outperformed compares favourably to global equity markets, with the MSCI AC World Index showing growth of 19.7%.
Looking more deeply into the Asia Pacific excluding Japan Index returns shows a significant part of the growth – more than a third – being derived from just one sector, information technology. Taking this a stage further to the stock level again shows significant concentration of returns.
Four stocks are responsible for 9.2 percentage points of the 13.3% performance shown by the sector: those being Tencent, Alibaba, Samsung Electronics and Taiwan Semiconductor Manufacturing. All of these names have performed strongly, and all were within the top five largest index constituents at the start of 2017. With the largest index holdings performing so well, it should come as no surprise that the average active manager underperformed the benchmark in 2017.
Looking forward, the region remains attractive from a relative growth perspective, with GDP estimates running ahead of developed markets, and the consensus view with regard to the key market of China appearing to be more widely held and showing only a small reduction in the rate of growth.
In the short to medium term there is likely to be some differentiation between countries in terms of monetary policy as the easing cycle unwinds and there are also elections due in a number of countries. All of this should provide opportunities for talented active managers.
Top Performing Funds
The top performers over the past three years include funds with a variety of different investment styles.
The Invesco Perpetual Asian fund has a strong track record versus peers and the benchmark, but it has seen a change of lead manager. William Lam took over in May 2017 having been co-manager since 2015, working alongside the team head and long-term manager of the fund Stuart Parks. Despite the manager change the overall approach of the fund remains intact, with Lam still conducting the stock research and drawing on other members of the team.
This includes Parks who is still able to provide top down views which may guide the stock research effort. Company research focuses on quality growth stocks, but there is a greater awareness of valuations compared to some peers and this can be evident at the total portfolio level where a slight value bias can sometimes be seen. The fund holds a Morningstar Analyst Rating of Bronze.
Veritas Asian has a Morningstar Analyst Rating of Silver and is managed by the highly experienced Ezra Sun. He joined the group in 2004 having previously worked with its founders at Newton. He is supported by a team of three analysts based in Hong Kong and all have worked together for a number of years. Sun looks to identify long-term themes and the companies that reflect these form the core of the fund. Shorter-term ideas make up the rest of the portfolio and reflect cyclical opportunities or more stock-specific special situations. Although the long-term focus can result in shorter-term periods of relative weakness, investors have been well-rewarded over the longer term.
Largest Funds
The largest funds in the sector include a number with strong performance track records.
Stewart Investors Asia Pacific Leaders has seen its share of change over recent years, but the investment philosophy remains unaltered and the broad portfolio biases and relative performance patterns are expected to continue. Since July 2016 the fund has been managed by David Gait who is an experienced investor in the region and has produced a long and successful track record on his all-cap Asia mandate.
This fund has a larger-cap bias and therefore includes some names Gait wouldn’t have held in the past, however his focus on sustainable growth stocks with strong management remains in place and the portfolio has clear biases to areas such as consumer staples. More recently markets have not favoured the approach, but long-term returns from the strategy are strong and the fund holds a Morningstar Analyst Rating of Silver.
A Morningstar Analyst Rating of Gold is held by the Schroder ISF Asian Total Return fund. It is managed with a benchmark-unconstrained approach that looks to invest in high return on capital stocks for their upside potential, but also shorts less attractive names. Index shorts may also be taken to protect the fund in weak market conditions. The fund is managed by the highly experienced team of King Fuei Lee and Robin Parbrook. They have worked together for over 15 years and are supported by a very well-resourced team of over 30 individuals. Returns relative to the index have been strong over time.
A version of this article appeared in International Adviser magazine
