Investors continue to dump the Morningstar Silver Rated Stewart Investors Asia Pacific Leaders fund, with the offering now having lost nearly £3 billion in assets since long-time manager Angus Tulloch stepped down almost two years ago.
Tulloch had been with the group since 1988 and had overseen the fund from its launch in December 2003 until stepping down in July 2016.
In that 17-and-a-half year period, the Scot turned a £10,000 investment into over £60,000 – a percentage return of 509%. That compares to 185% from its category benchmark the MSCI AC Asia Pacific ex Japan Index. He went on to retire from the group in September 2017.
Since July 2016, the fund has seen outflows of £2.9 billion, according to Morningstar Direct data. It’s seen nine months of consecutive outflows, amounting to just over £2 billion since July 2017.
Tulloch handed over to David Gait, who has been with the company for 19 years and has been lead manager for its fellow Silver Rated Asia Pacific Sustainability fund since 2005. In that time, he's presided over returns of 370% compared to 440% for the Leaders fund.
Gait is similarly respected as a fund manager, but has seen disappointing performance since taking over. In the period after Tulloch stepped down, the fund has returned just 18%, below the category benchmark’s 42%.
The company also saw a significant change back in mid-2015, with First State Stewart splitting into two separate entities: First State Stewart Asia and Stewart Investors. As a result, there are now fewer Asia-focused managers and analysts in the team.
Flows into this fund began to flatline at that point, before turning negative after Tulloch’s departure. Further, with the appointment of Gait came a change of style to using sustainability themes as a key driver of the process.
The combination of these factors will certainly have contributed to the outflows, with the performance likely to have been the main driver.
Investors Could Be Taking Profits
In truth, though, the fund is a behemoth. Even after the outflows, it’s got assets of over £8 billion, having accumulated plenty of fans over Tulloch’s reign. Morningstar analyst Simon Dorricott notes the outflows may be a case of profit taking, after its strong run of performance.
“We do see this sometimes from very large funds that have been in existence for a long period of time as investors reach their goals and start withdrawing capital,” he says.
“Here, the change of manager and slight change of approach has not helped, while recent performance has also been weak as the style has fallen out of favour, so it is no surprise that there have been further redemptions.”
But Dorricott has kept his rating for the fund unchanged ever since Tulloch left. Gait is an experienced investor, he says, and has “strong credentials”, having built an impressive track record on the Sustainability fund.
The change of process on the Leaders fund builds on the house style, Dorricott adds. The fund targets high-quality companies that offer predictable earnings growth, but emphasises names that are able to benefit from the sustainable development of the countries in which they operate.
The size of the fund, and the consequent larger stakes it takes in companies, helps is engage with its investee firms on sustainability and ESG issues.
The style also allows it to run with a long-term, low-turnover approach and gives it high active share relative to the benchmark.
On the underperformance in recent years, Dorricott points out that its new style means it might lag in certain market conditions, such as low-quality or cyclical rallies. In 2017, returns were impacted by the lack of exposure to China and the highly rated internet companies.
Some “minor question marks” remain. Gait’s ability to take on the challenges of a fund of this size being one; the Sustainability fund has just £461 million of assets. Also, his being able to deal with the fund’s market cap constraint, which stops it from investing in firms that have a value of under £1 billion.
“However, we think Gait is more than capable of dealing with these issues,” Dorricott counters.
Current top positions in the fund include India IT firm Tata Consultancy Services (532540), Singaporean bank Oversea-Chinese Banking (O39) and Japanese hygiene product manufacturer Unicharm (8113).
