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Top 100 Funds 2020: Asia ex-Japan

Our suggestions for exposure to Asia ex-Japan equities
Top 100 Funds 2020: Asia ex-Japan

Asia has some of the most dynamic economies and arguably the greatest growth potential of all geographic regions. It includes China and India, the countries with the world’s largest populations, where growing affluence is driving many areas such as consumer and financial services. While economic growth is not always reflected in stock markets, the ones in this part of the world are growing and becoming more accessible to foreign investors. They are home to some high-growth and high-quality companies, which good investment teams should be able to seek out. So it is not an area that long-term growth investors can afford to ignore.

But Asian equities are a higher-risk area that includes a number of emerging markets, which can be highly volatile. So you should have a long-term investment horizon and high risk appetite if you invest in this area – especially single-country emerging markets funds.

 

NEW ENTRANT: Fidelity Asia Pacific Opportunities (GB00BQ1SWL90)

Fidelity Asia Pacific Opportunities’ manager, Anthony Srom, who has run the fund since launch in 2014, maintains a high-conviction portfolio where each holding can meaningfully contribute to overall fund performance, and at the end of July the fund only had 29 holdings. However, he aims to mitigate concentration risk by diversifying the fund, for example by trying not to have holdings that have high correlations to each other. 

Mr Srom selects holdings on a combination of investor sentiment, valuation and fundamental research. “Mr Srom uses the breadth of resource within Fidelity to hone his best ideas, comparing what the market says about the share price of a company against his own interpretation of its valuation,” comment analysts at FundCalibre. “He focuses on finding the best companies rather than simply focusing on an industry or theme. His track record of minimising volatility is also impressive.”

Although he has a broadly style-neutral approach, he will take contrarian and value positions, and has an average holding period of more than two years. 

This means that the fund has greater exposure to certain stocks than other Asia ex Japan funds and lower exposure to some more popular holdings. So it could be a good diversifier in portfolios that already have an allocation to Asia, in particular via index tracker funds. For example, the fund holds a number of stocks not included in MSCI AC Asia Pacific ex Japan index, including its largest holding at the end of July, Hangzhou Hik-Vision Digital Technology (CHI:002415). A number of its other 10 largest holdings also did not feature in this index.

And the fund did not hold a number of key constituents of the index that often feature in Asia funds, such as Alibaba (US: BABA) and Tencent (700:HKG).

This approach has paid off: the fund has beaten the MSCI AC Asia Pacific ex Japan index and the Investment Association (IA) Asia Pacific Excluding Japan sector average in every full calendar year since its launch in 2014.

 

NEW ENTRANT: Goldman Sachs India Equity Portfolio (LU0858290173)

Two of the expert panel, Juliet Schooling Latter, research director at Chelsea Financial Services, and Rob Morgan, pensions and investments analyst at Charles Stanley, suggested adding Goldman Sachs India Equity Portfolio. This fund is run by Hiren Dasani and his team, who are based in India and Singapore, and aim for growth. They look to invest in good businesses of various sizes and company meetings are an important part of their investment process. They also consider the valuations of potential investments, and prefer real cash flows to paper profits. 

“The [fund’s investment team] invests across the market spectrum and prefers not to take big sector or economically driven tactical positions,” comment analysts at Charles Stanley. “The team benefits from considerable resource that the fund managers can use to analyse the Indian equity market. We like that the fund has demonstrated its ability to add value in mid-caps and small-caps, aided by its on-the-ground presence in Mumbai and rigorous approach to stock selection.”

The fund’s bias to medium and smaller companies means that it offers exposure to the domestic Indian economy, but this also adds to risk and volatility potential. However, stock-specific risk is mitigated in that it typically has between 70 and 90 holdings – 80 at the end of July. And its approach has paid off, with the fund outperforming the MSCI India index in seven out of 10 of the past 10 calendar years, and so far again this year. This adds up to good long term cumulative total returns. 

 

Stewart Investors Asia Pacific Leaders (GB0033874768)

Stewart Investors Asia Pacific Leaders’ managers, David Gait and Sashi Reddy, look to invest in companies that are positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate. They target quality sustainable companies with sound growth prospects. They like the managers of the companies they invest in to think like owners, have their wealth invested in the company, take a long-term perspective and have a record of treating all shareholders fairly. 

They aim to pay what they consider to be ‘sensible’ prices for investments as they are wary of valuations justified by high growth rate projections and/or unsustainably high profitability. And they look to hold investments for the long term. 

The focus on quality can mean that the fund outperforms in falling markets, such as when it made a positive return in 2018, and lags strongly rising markets such as in 2019. But it mostly delivers good positive annual returns, and over the long term – the timescale you should have if you invest in Asian equities – this approach has resulted in strong total returns.

The fund is relatively concentrated, with 41 holdings at the end of July. But analysts at FundCalibre say: “Stewart Investors Asia Pacific Leaders is heavily invested in more liquid large and medium-sized companies. Because these tend to be higher quality in nature, it helps mitigate risk. Historically it has had much lower volatility than other Asian equity funds.”

Stewart Investors Asia Pacific Leaders is also well diversified across sectors, with overweight allocations relative to the MSCI AC Asia Pacific ex Japan index to information technology, consumer staples and healthcare. Unlike a number of other broad Asia funds, it is very focused on India, where it had nearly a third of its assets at the end of July, and very underweight China relative to this index.

David Gait became a manager on the fund in the middle of 2015, and lead manager a year later. But he is very experienced and has a strong long-term performance record on other funds such as Pacific Assets Trust (PAC) and Stewart Investors Asia Pacific Sustainability (GB00B0TY6V50). Sashi Reddy has co-managed the fund since January 2016 and worked in First State’s Asia Pacific team for over 10 years.

 

Schroder AsiaPacific Fund (SDP)

Schroder AsiaPacific Fund has a strong record of outperforming regional indices such as MSCI AC Asia ex Japan and other Asian investment trusts. This performance has been achieved under highly regarded manager Matthew Dobbs, head of global small-cap equities at Schroders, who has run Asian investment portfolios since 1985 and this investment trust since launch in 1995.

However, Mr Dobbs will retire as manager of the trust at the end of March next year. Richard Sennitt will take over as manager, and Abbas Barkhordar will be assistant manager. But it is likely that they will run the trust along the same lines as at present, because Mr Sennitt has worked with Mr Dobbs on his Asian funds for the past 13 years. Mr Dobbs and his team select holdings according to their own merits, and look to take advantage of the domestic growth story in Asia. They have a focus on quality companies.

The trust’s board said: “Richard and Abbas will continue to draw upon Schroders’ deep resources in Asia and the research team based across the region will continue to play an integral role. Research remains key to Schroders’ investment process, and the portfolio managers will continue to work closely with a strong network of regional analysts and their fund management colleagues in eight offices around the region.”

Mr Barkhordar has worked at Schroders for 13 years, most recently on Schroders’ Frontier Markets fund. Analysts at Numis Securities say: “We do not expect significant changes to the investment approach. Mr Sennitt is experienced and currently lead manager of Schroder Asian Income Fund (GB00BDD29849). We understand that Mr Sennitt will step back from his global small-cap responsibilities to focus solely on the Asian mandates. Mr Dobbs will remain at Schroders as an adviser until the end of 2021.”

 

Fidelity China Special Situations (FCSS)

Dale Nicholls has run Fidelity China Special Situations since 2014, supported by analysts based in Shanghai and Hong Kong. He looks for undervalued companies that can deliver growth over the long term, and are most likely to benefit from China’s growth and changing economy. He invests in companies of all sizes, although focuses on smaller companies because he thinks that as these tend to be less well researched they should be more mispriced. He likes the companies he invests in to be cash-generative, have good long-term prospects and be run by strong managements.

Because smaller companies tend to be higher risk, Mr Nicholls thinks it is essential to meet company managements to understand them and monitor their progress. The trust’s investments include domestic-listed A shares, which accounted for 16.2 per cent of its assets at the end of July, although most of its assets are listed in Hong Kong. It can also put up to 10 per cent of its gross assets into unquoted companies, and held six of these which accounted for 4.7 per cent of its assets at the end of July.

The trust has 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 (NAV) per share performance relative to the MSCI China index. For its financial year ended 31 March 2020, although the ongoing charge came to 0.99 per cent the variable element was a credit of 0.2 per cent so ultimately the ongoing charge was 0.79 per cent.

“We rate the manager, Dale Nicholls, highly and his track record is strong since taking over the trust in April 2014,” comment analysts at Numis Securities. “The portfolio positioning means that performance is dependent on sentiment towards Chinese consumers. Fidelity China seeks to exploit the closed-end structure via its active use of gearing. This trust is attractive for investors who are comfortable with the risk profile and there should be limited downside to the discount due to the discount control policy.”

 

Aberdeen New India Investment Trust (ANII)

Aberdeen New India Investment Trust’s managers, Kristy Fong and James Thom, conduct intensive research and regularly make contact with companies. This is to help them identify well-governed companies that can deliver sustainable long-term growth and weather Indian market volatility. They pick companies regardless of their index or sector weightings.

They also engage with companies to improve the treatment of minority shareholders and will not invest in ones they think have poor managements. Although India faces economic difficulties in the short term due to the coronavirus pandemic, the trust’s managers are sticking to their investment process. Ms Fong said in August: “The quality companies in which we invest, with strong balance sheets and strong management teams, should be able to weather the storm better than most. We have been more defensive in our positioning and continue to take a cautious stance, expecting more market volatility in the near term. However, where we see good quality stocks unduly punished, we have opportunistically topped up more by drawing down gearing and have room to do more should the markets continue to fall. The trust remains focused on identifying companies which possess deep barriers to entry and clear earnings levers, with prudent capital management. These holdings should deliver sustainable returns over time.”

Aberdeen New India Investment Trust’s NAV returns lagged MSCI India index in 2017, 2019 and over the first seven months of this year, so its cumulative total returns do not look good. However, it otherwise has a good record of beating this index.

 

 

Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)Ongoing charge plus any performance fee (%)Morningstar Sustainability Rating
Stewart Investors Asia Pacific Leaders4.5 19.5 68.7 0.88Above Average
Fidelity Asia Pacific Opportunities 12.0 38.1 141.4 0.90Above Average
Schroder AsiaPacific Fund share price14.9 17.4 111.3 0.93* 
MSCI Asia Pacific Ex Japan index7.6 11.7 86.2   
Fidelity China Special Situations share price53.8 46.1 170.0 0.99* 
MSCI China index24.9 25.5 118.4   
GS India Equity2.7 (2.6)55.8 1.06Average
Aberdeen New India Investment Trust (11.2)(7.3)44.3 1.14* 
MSCI India index(6.3)(1.9)47.9   

Source: Morningstar, *AIC.                    

Performance data as at 31 August 2020.                    

**Data shown is for a different share class to the one indicated in the text