IT Insider: The all-Asia trusts that deserve to survive

One of the oddest anomalies in the investment company sector has to be the differential in the ratings of the Asia including Japan funds vs. Asia excluding Japan.

At the moment the difference is less marked than it has been but Asia ex Japan trades on average at an 8.1% discount, Asia including Japan on 14.2% and, this is what makes it so odd, the average Japanese fund is on a 10.5% discount.

So, in theory, splitting an Asia including Japan fund into its component parts would make you money. The obvious conclusion is that investors do not want Japan lumped in with the rest of Asia. Does this make logical sense?

After all, Japan is geographically in the same place and it does 50% of its trade with other Asian countries. This may be true but Japan is still a very large economy and fiscally and culturally it is out of step with its neighbours. Most asset allocators would no doubt prefer separate Asian and Japanese funds. The discount anomaly has been a persistent one and this has made the sub-sector a target for corporate activity.

There are three Asia including Japan funds left. Aberdeen All Asia is what is left of Govett Oriental.The Govett fund was dismembered in 1998, part was renamed Govett Asia Recovery, it was taken over by Gartmore and then the mandate was given to Aberdeen in 2006.

Martin Currie Pacific is a survivor. Launched in 1985 as a pan Asia fund, it deliberately underweighted Japan in its benchmark – recognising that economic growth was more likely in the rest of Asia. In 2008 it adopted the MSCI All Country Asia Pacific index as its benchmark but this year it has shifted further away from Japan – fixing the Japanese element at 25% +/- 15%. The move merited a change of investment manager with Andrew Graham replacing John Millar who had been managing the fund for the past eight years.

Witan Pacific splits its portfolio between two managers, Aberdeen and Nomura, with roughly a 50:50 split. The fund has a long history but was F&C Pacific from 1985 to 2005 when the board decided to move the management contract after an extended period of poor returns.

None of the funds is particularly large, market caps range from £46m for Aberdeen All Asia to £138m for Witan Pacific. All of them have are underweight Japan relative to the MSCI Asia Pacific Index. The Aberdeen and Witan funds have fairly similar five year performance but the Martin Currie trust lags them over most time periods.

I would question whether any of these funds should continue in their current form but if there has to be an Asian including Japan fund then it should probably be Witan Pacific.

The Martin Currie fund had a continuation vote in 2010 and 98% of those voting were in favour of the fund carrying on. The turnout was fairly low though at 38% so I wonder whether it was just inertia – the discount at the time was over 15% and over three years shareholders had lost money while investors in the other two funds had made between 10% and 20%. Since the vote the performance has continued to lag the other two funds.