Asian equities have continued their strong performance this year, making a decade high this week, as economic conditions in the region improve while valuations remain attractive relative to developed markets.
The region has become almost a ‘safe-haven’, with stable and reform-focused governments in the main economies of the region such as China, India and Indonesia. In contrast, there is much uncertainty in developed markets following Donald Trump’s election as president of the US, Britain’s decision to exit the EU and ongoing political events in Europe.
Investment Association (IA) Asia Pacific ex Japan sector has been one of the best performing sectors both year-to-date, returning an average 16.8%, and over the longer term.
The sector is home to many well-managed funds that invest in both more mature economies such as Korea, Taiwan, Hong Kong and Singapore, together with newer emerging economies such as the China, India, Philippines and Indonesia. Some funds also have the flexibility to invest in commodity producing economies such as Australia.
Money Observer Rated Schroder Asian Total Return fund has been among the top performing funds in the sector, sitting comfortably in the 1st quartile relative to peers year to date and over 1, 3, and 5 years.
The fund is managed by highly experienced veteran fund managers Robin Parbrook and King Fuei Lee since inception on 16 November 2007. Although the fund was soft-closed to new investment in December 2010, since 2013 they have also managed an investment trust of the same name – Schroder Asian Total Return – (ATR) which follows a similar investment approach.
Managers focus on picking quality growth stocks with an absolute return mindset, not constrained by any benchmarks and extensively use derivatives to provide downside protection in falling markets and preserve capital.
Because the fund is unconstrained its managers can avoid whole countries and sectors if they choose to. They prefer to capture long-term growth in Asia using a ‘best ideas’ approach.
Managers long-held view is that running an excessively top-down investment strategy that focuses on the macroeconomic or market trends before picking stocks, can be dangerous.
A good example is that strong economic growth in Asia does not necessarily lead to good market returns, particularly in countries such as China and India, so it is vital to invest in the right companies.
Though China looks like it has a financial bubble, with debt at 282% of GDP and the state-owned enterprises, Chinese banks and financials often poor investments, they continue to have around 27% exposure to Chinese private stocks.
However, investors should not let the macroeconomic noise distract them from great stock picking opportunities.
The white goods industry is a good example where the best Chinese brands (Midea and Haier) are growing their market presence quickly, as their economies of scale have enabled them to significantly improve their products and be globally competitive.
Equally, as is increasingly the case in India, investors should not let a great macroeconomic story draw them away from the fact that there are currently few investment opportunities at sensible valuations. The fund has only 9% exposure to India.
Over the last few years, markets have become increasingly aware of effects of technological innovation and disruption. Almost half the MSCI index is made up of sectors facing severe technological disruption.
Although so many Asian companies operate in “challenged” sectors, managers believe that through careful stock selection and management of the market cycle they can deliver good returns for investors.
Managers avoid utilities and energy sectors on the view that rapid development in renewables, shale gas, electric vehicles and grid energy storage means the demise of the fossil fuel industry is inevitable.
They have positioned the fund to reflect their belief that there is an accelerating trend (‘dematerialisation’) away from the consumption of goods (‘stuff’) and towards more services (‘fluff’). As a result, the digital disruption continuing across the retail industry challenging traditional model with a rise in e-commerce and digital technology.
No surprise that the largest fund exposure remains to the technology sector at 32%. It is mostly to Chinese e-commerce and large cap tech hardware companies like Taiwan Semiconductor, Largan Precision,Samsung Electronics (SMSN) and Hangzhou Hikvision where the threat of US-based competition is minimal and margins higher.
The fund has also exposure to healthcare stocks like Resmed (RMD) and selected financials like ASX Ltd.
Going forward, managers are cautious in their outlook and expect more muted returns from Asian markets. Given the strong performance year-to-date, valuations with the exception of China are looking expensive and vulnerable to falls.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.