After many years as the world’s favourite place to invest, Asia now finds itself unloved. An investment in the MSCI Asia Pacific ex Japan Index would still have made you money over the past three years but only just, and over the past year you would have lost 12.1%.
Discounts on Asian funds are wider than usual (bucking the trend for most of the investment company sector) and a panel of economists at the AIC’s recent conference for directors was decidedly downbeat about the region – though to be fair, they were pretty negative about the outlook for just about everywhere.
I am not sure the region is so unloved yet that you should be thinking about picking up bargains but I am wondering how far off that time is.
A stand out performer
The Asia Pacific income funds and smaller companies funds have fared best over the past three years but, among the large cap growth funds, Pacific Assets (PA) stands out as the best performer by some margin (up by almost 25% in net asset value terms and 32% in share price terms). I like this trust and its approach to managing money is genuinely different from other Asian funds.
PA has been managed by David Gait at First State Stewart since July 2010 (when the management contract was transferred to them from F&C).
The investment objective is much like those of the other funds in its peer group – long-term capital growth through investment in selected companies in the Asia Pacific region and the Indian sub-continent, excluding Japan, Australia and New Zealand.
But be aware, when comparing funds in the peer group, their definition of what constitutes Asia does vary and PA is allowed to invest up to 20% of its assets in countries other than those mentioned above (fair enough, as quite a few companies whose operations are primarily in Asia are domiciled elsewhere).
The board has set some risk limits: its largest investment should not exceed 7.5% of total assets at the time of investment; use of derivatives is allowed but with prior board approval and within agreed limits.
The biggest difference between PA and its peers however is its investment strategy.
First State Stewart aims to invest PA’s portfolio in sustainable companies. This makes it sound as though PA is a green or an ethical fund, but First State Stewart’s aim is to invest in companies that can produce sustainable returns despite, or even as a consequence of, tackling some of Asia’s most pressing problems.
The problems they have identified that need to be addressed include population pressure, resource shortages, poverty, inequality and corruption. On the latter point, they engage with the companies they invest in and emphasise standards of corporate governance and business ethics. Portfolio companies should also have a positive impact on society and the environment. Another main aim is to identify what might go wrong with each investment and seek to minimise the impact from nasty ‘surprises’.
These are laudable sentiments but a cynic might question why these traits should have a positive impact on performance.
Over the past three and a half years, PA’s net asset value had risen 35.6% versus 13.2% for the MSCI All Country Asia ex Japan Index and 16.2% for PA’s peer group – but there are some factors at play here that must be having an impact.
PA is a true stock picking fund. Its asset allocation is driven by its stock selection decisions. One country where it struggles to find companies that have sufficiently high corporate governance standards and where management has a laissez-faire attitude to environmental issues is China.
Consequently PA has just 4% of its assets invested in China and, as that country has been out of favour with investors, PA has outperformed.
By contrast, First State Stewart is finding companies in India that are more aligned with its values. At the end of January 2014, PA had 27% of its portfolio invested in India. The MSCI India is 13% ahead of MSCI Asia ex Japan over the past year.
Underweight resource stocks
PA’s investment strategy also leads it to be quite light in resources stocks, though it does hold gas companies that are benefiting from a desire to promote cleaner fuel. The resources sector has been underperforming and PA’s relative performance has benefited as a result.
So is PA’s recent outperformance just a happy coincidence of its investment style driving a favourable asset allocation? Maybe – but I would venture that its stock picking has had quite a big effect too and this might contribute to prolonged good performance even when China and the resources sector come back into favour.
Only one of its top 10 holdings, Marico, has disappointed over the past year and this is only down 6%. The largest holding, Tech Mahindra, an Indian IT company, is up 64% over the past year.