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First State Asia Pacific surges

This actively managed Asia Pacific fund is now storming ahead after a shaky one-year performance
August 20, 2014

With Middle East and Eastern European geo-political tensions still bubbling away, investors are moving their money away from emerging market equities. However, Asian and Japanese equities have received a boost from recent rounds of stimulus from the Chinese government and, conversely, investors have been pouring in.

IC TIP: Buy

But Ben Gutteridge, head of funds research at Brewin Dolphin, says such measures are intended to reverse the negative impact that previous efforts to tighten credit markets have had on the economy, and may not be a good thing for long-term growth.

"Such an approach, while short-term positive, undermines any promise of reform and raises issues around sustainability. With a huge misallocation of capital the consequence of the 2009 large-scale stimulus, non-profitable projects must be allowed to restructure or the debt problems will become even more destructive in the future," he said.

For this reason, Mr Gutteridge prefers Asian funds that retain a quality bias, such as IC Top 100 Fund, First State Asia Pacific Leaders (GB0033874214). This fund avoids many of the value opportunities that may, ultimately, prove to be value traps should Chinese growth disappointments resume. Instead, the focus remains on consumption, which is underpinned by an 'income/earnings' strategy.

Year-to-date (to 15 August 2014), the fund has returned 13 per cent, 5 per cent above its IMA peer group (Asia Pacific Excluding Japan), which has made an average of 8.4 per cent over the same period.

And, historically, its performance has been strong. First State Asia Pacific Leaders has beaten its benchmark over three and five years, with a 35 per cent versus 28 per cent and 80 per cent versus 58 per cent respective return.

The only period where it is not first quartile of its peer group is over one year (to 15 August 2014). This is because it includes the latter part of last year, when its overweight position in India detracted from performance as the Indian economy was considered relatively fragile, and the rupee devalued over 20 per cent.

But India is what has propelled its recent rally since the start of the year, as a region which has turned its fortunes around. It is now enjoying a bull run following the election of prime minister Narendra Modi in May, an event that was hailed as the beginning of a 'new era' for India. The fund has nearly 22 per cent invested in India, compared to its benchmark, the MSCI Asia Pacific ex Japan index which has just 6.4 per cent invested. It also has heavy weightings to Australia (16.4 per cent) and Hong Kong (14.6 per cent).

In 2013, the fund was also overweight Malaysia, but it has since scaled back its exposure to the region, with a 3.1 per cent allocation compared to 3.7 per cent from the benchmark.

The fund is managed by Angus Tulloch and Richard Jones. As a manager, Mr Tulloch is well known for being bearish and playing it safe with investors' money. He has a preference for large companies with sustainable cash flows and robust balance sheets, rather than bargain companies that look cheap. Because of this quality bias, his funds usually do well in falling markets, but lag during market rallies, which is why his current outperformance is less expected, and therefore, more impressive.

Sector-wise the fund is most heavily invested in financials (28.1 per cent) consumer staples (13.1 per cent) and information technology (12.6 per cent), while its largest holding is in CSL (CSL:ASX), the engineering firm, which makes up 5.8 per cent of the portfolio. It also has large weightings to OCBC (O39:SES), the Singapore Bank (4.9 per cent) and Cheung Kong Holdings (1:HKG), the multi-national conglomerate (4.4 per cent).

Brewin Dolphin has maintained its 'buy' recommendation on the fund. Its analysts believe it is in a strong position to outperform over the next economic cycle and, as such, the fund still forms the core element of its Asian exposure.

Geographical allocation

RegionAllocation (%)
Asia - developed45.3
Asia - emerging34.4
Australasia16.4
Japan2.10
US1.60
Source: Morningstar on 18 August 2014

Top 10 Holdings

HoldingRegionAllocation (%)
CSL Australia5.90
Oversea-Chinese Banking CorpSingapore4.90
Cheung KongHong Kong4.40
Taiwan Semiconductor ManufacturingTaiwan3.40
Hong Kong and China Gas CoHong Kong3.40
Axiata BhdMalaysia3.20
Mahindra & Mahindra India3.00
Housing Development FinanceIndia2.98
DBSSingapore2.92
Newcrest MiningAustralia2.85
Source: Morningstar, as at 18 August 2014

Performance data for First State Asia Pacific Leaders vs. benchmark

One-year return (%)Three-year return (%)Five-year return (%)
First State Asia Pacific Leaders A € Acc8.235.280.0
MSCI AC Asia Pac Ex JPN NR USD8.228.258.0
Source: Morningstar, as at 15 August 2014