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Trust Insider: how this unheralded trust beat the China bear

by James Carthew on Mar 25, 2014 at 07:30

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.

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