Top 100 Funds 2019: Asia ex-Japan

Stewart Investors Asia Pacific Leaders (GB0033874768)

Stewart Investors Asia Pacific Leaders has a strong long-term performance record, but much of this was achieved before current manager David Gait became a manager on the fund in the middle of 2015, and lead manager a year later. But Mr Gait is a very experienced manager who has a strong long-term performance record on other funds such as Pacific Assets Trust (PAC) and Stewart Investors Asia Pacific Sustainability (GB00B0TY6V50).

Stewart Investors Asia Pacific Leaders is slightly behind MSCI AC Asia-Pacific ex Japan index over three years, albeit with a double-digit return of over 25 per cent. Part of the reason for this was because the fund underperformed this index in 2016 and 2017, albeit with double-digit returns. But it made a positive return of 5 per cent last year when this index fell over 8 per cent, and is ahead of it over one year and six months.

This is in keeping with Mr Gait’s strategy of investing in quality sustainable companies over a long period with a strong valuation discipline, which means he typically outperforms in falling markets and lags strongly rising markets. But over the long term – the timescale you should have if you invest in Asian equities – this approach has resulted in strong total returns.

Sashi Reddy has co-managed the fund since January 2016 and worked in First State’s Asia Pacific team for over 10 years.

“I like the team's focused approach to identifying quality companies in the region, with the intention of being long-term stable shareholders,” says Mr Morgan. “This is a differentiated way of investing that enables the team to avoid corporate governance issues and benefit from the long-term growth opportunities available across a diverse range of markets. The fund has a structurally high active share and its managers disregard the benchmark when constructing the portfolio. They focus on long-term absolute returns and are not obsessed about short-term relative performance versus a benchmark.”

Invesco Asia Trust (IAT)

Invesco Asia has a strong record of beating the MSCI AC Asia ex Japan index, but over three years it has underperformed. This is because the trust underperformed MSCI AC Asia ex Japan index in 2018 and is slightly behind it over the first seven months of this year – albeit with a double-digit return. In most other calendar years it has beaten this index.

In December 2018 its board introduced a new income policy. It will aim to increase the dividend every year, and if necessary use the trust’s revenue and capital reserves to do this. It paid 5.7p a share in respect of its financial year to 30 April 2019, up 3.6 per cent on the year before. This was mainly funded by earnings per share of 5.55p, but also drew from its revenue reserve. The trust’s board hopes that the new dividend policy will help to narrow its discount to net asset value, which was 10.3 per cent as of 27 August.

The trust’s managers’ strategy of searching for companies whose shares they think trade at a significant discount to fair value is not changing, and it only has a yield of around 2 per cent. So Invesco Asia is still an option for growth investors who could reinvest the dividends.

The trust’s board has also introduced a tiered management fee. The trust used to pay Invesco 0.75 per cent of its total assets less liabilities a year, but now only pays at that level for assets up to £250m. It will pay 0.65 per cent a year on assets over this amount. It had assets of £221m as of 31 August, so its ongoing charge of 0.96 per cent could fall if the trust grows.

Schroder AsiaPacific Fund (SDP)

Schroder AsiaPacific Fund has a strong record of outperforming regional indices such as MSCI AC Asia ex Japan. It is run by highly regarded manager Matthew Dobbs, who is head of global small-cap equities at Schroders and has run Asian investment portfolios since 1985.

“Schroder AsiaPacific aims to take advantage of the domestic growth story in Asia through a bottom-up, stockpicking approach focused on quality companies,” comment analysts at Numis Securities. “It benefits from an experienced manager and has an impressive long-term track record, with net asset value  returns of 16.2 per cent a year over the past decade, compared with 12.6 per cent a year for MSCI AC Asia ex Japan index. The trust has consistently achieved top-quartile performance versus both open- and closed-ended funds.”

The trust’s board has recently cut its management fees. It used to charge 0.9 per cent a year on the first £300m of assets, 0.8 per cent on assets between £300m and £600m, and 0.75 per cent on assets above £600m. But since 1 April it has charged 0.8 per cent a year on the first £600m of assets and 0.75 per cent on those above the amount. It had assets of £870m as of 31 August, and is one of the largest and most liquid Asian investment trusts.

Fidelity China Special Situations (FCSS)

Fidelity China Special Situations has a good record of outperforming its benchmark, MSCI China. Its manager, Dale Nicholls, invests in companies of all sizes, but concentrates on small- and medium-sized companies. The trust can invest in domestic-listed A shares, in which it had 10.5 per cent of its assets at the end of July, and holds five unlisted companies that accounted for 4.9 per cent of its assets. It can invest up to 10 per cent of its gross assets in unlisted companies.

In June, the trust’s board introduced a formal discount control policy whereby it will seek to maintain the discount in single digits in normal market conditions and will, subject to market conditions, repurchase shares with the objective of stabilising the share price discount within a single-digit range. The trust traded at a discount to net asset value of 7.5 per cent as of 27 August, one of the tightest levels it has been at in the past few years. During its last financial year, before the introduction of the control policy, the discount to net asset value narrowed from 12.3 per cent to 7.9 per cent, helped by a buyback of 1.84m shares equivalent to 0.33 per cent of its share capital, according to Numis Securities.

“It makes sense for the board to formally adopt a control to keep the discount in single digits and give investors greater comfort that downside to the discount is limited,” comment analysts at Numis Securities. “The trust has a market capitalisation of £1.1bn, so has significant firepower with which to repurchase shares without impacting trading liquidity significantly. We rate Dale Nicholls highly and his track record is strong since taking over the portfolio in April 2014, with a net asset value total return of 97 per cent versus 75 per cent for MSCI China index in sterling.”

Last year the trust introduced a variable fee structure whereby it has a headline annual fee of 0.9 per cent of net assets, and a variation fee of plus or minus 0.2 per cent based on the trust’s net asset value per share performance relative to its benchmark index. The maximum fee that the trust will pay Fidelity is 1.1 per cent of net assets, but if it underperforms its benchmark the overall fee could be as low as 0.7 per cent of net assets.

Fidelity China Special Situations had an ongoing charge of 0.93 per cent at the end of its last financial year.

Aberdeen New India Investment Trust (ANII)

Aberdeen New India Investment Trust has a good record of beating MSCI India index in terms of its net asset value returns. The trust’s managers invest in companies with pricing power and solid fundamentals that benefit from India’s long-term consumption trends. Their preferred holdings play to the strengths of what the country has to offer in technology services and engineering skills, which they say also feeds well into the global digitalisation trend.

The trust had 23.7 per cent of its assets in consumer company shares at the end of July and 18 per cent in technology shares, although its largest sector exposure was financials, which accounted for 26.1 per cent.

“The Aberdeen approach combines quality and growth at a reasonable price,” says Mr Morgan. “The nature of the Indian market has married well with Aberdeen’s tolerance for owning companies trading at higher valuations when the premium is justified. There is much to admire about the Aberdeen Asian research function, of whose universe India is an important part. The team is patient and disciplined investors who take a long-term view and maintain a high hurdle for corporate governance standards.”

Jupiter India (GB00BD08NQ14)

Jupiter India’s cumulative total returns don’t look good, but this is largely due to underperformance in the past two calendar years, and so far this year. Before this, Jupiter India had a strong record of outperforming its benchmark MSCI India.

The reasons for the underperformance include its focus on domestic-facing consumer stocks and lack of exposure to exporters that had done well. It also invests in smaller companies that are not included in MSCI India index and other investors have favoured larger companies, pushing up their share prices more quickly.

The fund’s manager, Avinash Vazirani, argues that these larger companies are not good value. He invests according to a ‘growth at a reasonable price’ style. He looks to hold over the long term companies he thinks are the best of their kind, have the potential to grow, may benefit from country-wide structural trends and whose shares are trading at reasonable valuations.

If these holdings come to fruition the fund’s performance could return to form and deliver strong growth over the long term – the period over which you should hold this fund.

Its X share class also has a very low ongoing charge relative to other active India funds of only 0.69 per cent.