Asian equity markets started 2011 in an optimistic mood, supported by the perceived global economic recovery. However, the sovereign debt crisis in Europe began to escalate and intervention from politicians and central banks was needed to alleviate investors’ worst fears.
China and India, which had been able to continue growing at a strong pace since 2008, began facing inflationary pressures that required their respective central banks to introduce interest rate rises. The tightening policies and subsequent slowing growth led to concerns over whether a “soft landing” was achievable.
Furthermore, natural catastrophes such as Japan’s earthquake and the floods in Australia, Thailand and the Philippines, as well as political turmoil in the Middle East and north Africa added to investor concerns.
As a result, the MSCI AC Asia ex Japan index declined by approximately 17% in US dollar terms in 2011 as a whole, underperforming the MSCI World index, which fell approximately by 5% in comparison.
While investor sentiment has improved in recent months, the global macroeconomic outlook remains unclear. Progress has been made to ease the eurozone sovereign debt crisis, but without much-needed structural reforms in Europe, the volatility in markets is likely to continue.
A more challenged outlook for developed economies, combined with slower global growth is likely to have negative repercussions in the developing world. Indeed, Asian economies dependent on export markets in the West already saw declines and downgrades to earnings forecasts.
That said, Asia’s long-term prospects remain unchanged. The region’s economic growth, albeit at a slower rate, continues to compare favourably with developed markets. The region is also becoming less dependent on exports and domestic consumption and intra-Asian trade grows strongly.
Moreover, inflationary pressures appear to be easing, which raises the possibility of monetary policy easing while most governments in the region are in good fiscal shape. This gives them an opportunity to stimulate their economies if necessary.
We have selected three funds that exhibit a variety of opportunities within the Asia ex Japan sector. The Schroder Asian Alpha Plus fund is a concentrated best ideas portfolio, which is unconstrained by sectors or regions. The approach is predominantly bottom-up with a macro overlay.
The Newton Asian Income fund is managed with a yield discipline and preference for sustainable business models. The process focuses on identifying investment themes and translating those into appropriate stock selection.
The Templeton Asian Growth fund uses a team-based approach benefiting from some of the most experienced managers in the region. The process is bottom-up targeting attractively-valued companies with financial strength and quality of the business model.
Schroder Asian Alpha Plus
The Schroder Asian Alpha Plus fund holds a Morningstar OBSR Analyst Rating of Silver. It is managed by the experienced Matthew Dobbs who is based in London.
The fund’s inception was in 2007 and the manager has run the Schroders Asia Pacific investment trust since 1995 using a very similar approach. He is supported by Schroder’s team of analysts based around the world.
The unconstrained nature of the portfolio can lead to more than 40% of the holdings coming from outside the benchmark. The investment process is bottom-up, where Schroder’s team of analysts undertakes research looking for best opportunities across the region.
In particular, they like companies that are likely to fall into the following four broad categories: positive transition, core (superior business models), opportunistic plays, and companies with intrinsic worth.
In the long-term the manager is conscious of valuation, while in the short-term he looks for catalysts which may drive share prices. Qualitative factors such as the business franchise, quality of management and visibility of earnings are also crucial considerations of the manager’s approach. The portfolio typically consists of 60-80 stocks.
The fund is viewed as a solid offering, benefiting from a high-quality manager. The manager’s talent for stock picking has generated impressive relative performance since inception.
Newton Asian Income
The Newton Asian Income fund holds a Morningstar OBSR Analyst Rating of Silver. The fund manager, Jason Pidcock, has 18 years’ Asian investment experience and was one of the first managers in the UK to launch an Asian Income fund in November 2005.
A strength here is the manager’s clear execution of the strategy, which in our opinion makes him a strong choice in the Asian Income space. He is supported by Newton’s 22-strong career analyst team.
The investment approach rests on identifying investment themes and selecting high-conviction stocks within those themes, while at the same time benefiting from a strict yield discipline. The manager aims for a dividend yield of 35% above that of the benchmark.
The income focus means the fund concentrates on quality companies with disciplined capital allocation, cashflow generation, and good corporate governance. The manager typically runs a concentrated portfolio of approximately 45-50 stocks.
The disciplined income-oriented process has been consistently applied and has resulted in a return profile that has not only met its yield objective, but also provided investors with a very competitive total return. The defensive nature of the portfolio helps the fund to preserve capital and minimise volatility when markets are in a flux.
Templeton Asian Growth
The Templeton Asian Growth fund holds a Morningstar OBSR Analyst Rating of Bronze. The fund is managed with a team-based approach. The portfolio managers are Mark Mobius and Allan Lam, who are senior members in the Templeton Emerging Markets Research Team. Mobius has more than 40 years of emerging markets experience, and Lam has over 20 years experience.
They are supported by over 40 investment professionals, more than half of whom are based in Asia. They bring first-hand knowledge of specific countries and the ability to capitalise on opportunities others may fail to uncover.
The fund is managed using a bottom-up stock selection process that aims to seek out the most attractively valued stocks, which is in keeping with the approach adopted by the group’s wider Emerging Markets team. The team sets strict qualitative criteria for the companies, aiming to identify the long-term drivers of a business.
They look at the market price of a company relative to their evaluation of the company’s long-term earnings, asset value and cashflow potential. A meaningful amount of time is spent visiting a company’s management and operations to gain additional insight.
While investment decisions are primarily driven by fundamental analysis, the team also considers the country, market, and economic environment. Favoured companies are those with attractive valuation, quality management, financial strength, good corporate governance in industries with sufficient barriers to entry. The fund typically holds 50-80 stocks.
We hold a high regard for the managers Mark Mobius and Allan Lam, the support they receive from their well-resourced team and the long-standing and proven process. In addition, Franklin Templeton has a solid track record of successfully investing in Asia since 1987, which is reflected in the fund’s impressive track record.
This Morningstar article originally appeared on Professional Adviser.
