Tap into potential recovery winners with Invesco Asian

With Chinese equities racing ahead, Asia has been the standout investment region of 2020. MSCI AC Asia ex Japan index returned 13.3 per cent between the start of this year and 29 October, far outstripping gains made by US, emerging market and Japanese equity markets. The long-term investment case for the region also still stands, for reasons including strong demographics and attractive dividends. However, as this regional market's returns have been led by a handful of stocks and sectors, you may want to diversify your Asian exposure with a fund that can capitalise on unappreciated market trends.

A fund that may fit the bill is Invesco Asian (GB00BJ04DS38), which has been run by William Lam since 2015. Mr Lam and his team aim to outperform markets over the medium term by finding companies that trade at a significant discount to their fair value. Their process involves considering what a company’s expected earnings growth might be, the quality of its management and any competitive advantages. They also assess metrics such as balance sheet strength and cash flow.

Importantly, a value-oriented approach can mean a fund invests beyond the most popular areas of the market, so provides some differentiation to mainstream exposure. Analysts at research company FundCalibre note that Mr Lam and his team go “where other managers fear to tread, with a value focus that the industry has recently shied away from".

But Invesco Asian's value-oriented approach does not result in a fund that is entirely contrarian. The fund had 6.9 per cent of its assets in Taiwan Semiconductor Manufacturing (TAI:2330) at the end of September – slightly more than MSCI AC Asia ex Japan index's weighting to this stock – and a 6.6 per cent position in Samsung Electronics (KOR:005930), which represented 4.2 per cent of the index. Alibaba (US:BABA) and Tencent (HK:700) also featured in the fund’s top 10 holdings, although it had less exposure to these companies than the index.

The fund has a good mix of exposure to companies that have fared well in 2020, and less popular names. Invesco Asian's managers recently said that it has a 50/50 split between “virus-safe” sectors such as tech and internet businesses, and “virus-sensitive” stocks including financials and other cyclicals. Exposure to the latter should pay off if an economic recovery emerges in Asia.

“The outperformance of tech and internet this year has put upward pressure on their weights in our portfolio as well as their weights in the index,” said the fund's managers. “So we have been maintaining the 50/50 split within portfolios by recycling the profits in tech and internet into other areas.”

They have taken profits on internet holdings such as JD.Com (US:JD) and NetEase (US:NTES), semiconductor company MediaTek (TAI:2454), and hardware producers Gigabyte (TAI:2376), Asustek Computer (TAI:2357) and Delta Electronics (TAI:2308). And they have been adding to more cyclical stocks such as carmakers Hyundai Motor (HYUD), Dongfend Motor (HK:489), Astra International (INDO:ASII) and Mahindra & Mahindra (IND:M&M). 

Mr Lam and his colleagues have adopted a contrarian approach on energy, buying into the sector amid oil price weakness in the belief that a resulting lack of new supply could eventually push up prices. Within financials, the team sold some names earlier this year but retained holdings in selected banks which, “given our focus on balance sheet strength, are better capitalised than the already well capitalised average bank in the Asian market”.

Perhaps because of its different approach, the fund has lagged the index this year and does not necessarily offer 'core' exposure to Asia. Value-style investing can also go through periods of underperformance.

But the fund outperforms over five years, offers different exposures compared to many other funds and could prosper if any recovery extends beyond the market’s current winners. So if you are seeking growth over the long term, can tolerate some volatility and want to diversify your Asian exposure, Invesco Asian looks like a good option. Buy. DB