The amount of money that poured out of Asia Pacific equities at the end of last year was “bemusing”, according to Aberdeen’s star manager Hugh Young (pictured), who says the sector’s rebound this year is due to common sense returning to the market. Asian equities considerably underperformed the US and UK in 2013 due to various macroeconomic headwinds such as the Fed’s QE tapering and concerns over Chinese growth.
The Aberdeen Asia Pacific Equity and Aberdeen Global Asian Smaller Companies funds – which have historically been two of the leading lights in the sector – were hit particularly hard with both delivering bottom quartile returns in 2013.
Performance of funds versus sector in 2013
Source: FE Analytics
Both the sector’s and Aberdeen’s fortunes have changed so far in 2014 however, and Young – head of Asian equities at the group – says this is because investors had over-reacted.
“We had a very, very poor year last year,” Young said.
“This year there has been a bit of a reversal and we have had a good start to 2014. We saw some pretty heavy outflows at the back end of last year and at the beginning of this year as lots of people were in a herd-like mentality. While I probably shouldn’t say they were panicking, there were some pretty huge figures.”
Though Young was speaking about the region in general, his funds also saw substantial outflows.
Our data shows that the now £2.1bn Aberdeen Asia Pacific Equity fund has shrunk by £500m over the past 12 months, while the five-crown rated Aberdeen Global Asian Smaller Companies fund has seen assets fall from $5.6bn in May last year to $3.8bn at time of writing.
Young, who has a bias towards companies with strong balance sheets and predictable earnings, told FE Trustnet in January that his underperformance last year was due to lower quality companies leading the market.
However, while Asia Pacific equities in general have performed well compared to developed markets in 2014, the Aberdeen Asia Pacific and Asian Smaller Companies have started to come back even stronger with both turning out top quartile returns since the market bottomed in January.
Performance of funds versus sector in 2014
Source: FE Analytics
The manager attributes his fund’s recent rebound to common sense returning to the sector.
“I must say, we were slightly bemused by it [last year’s outflows],” he said. “I think people have woken up and realised that Asia Pacific and emerging markets have underperformed developed markets substantially over recent years and also realised that it isn’t the end of the world.”
“I think just a bit of common sense has come back to the market.”
“While the outlook isn’t great, with growth below trend, most of the regions we are investing in are growing at around 4 per cent. Companies are also fine. Earnings growth may not be that exciting, but it is still 8 or 9 per cent.”
“The sell-off was really driven by big macro factors such as current account deficits and currency concerns, but it didn’t make much sense that all that money came out,” he added.
While Young says that the investors who pulled their money out made a mistake, he is quick to point out that he isn’t massively bullish on the region and, because of that, he doesn’t expect Asian equities to shoot the lights out this year.
“It’s difficult – I can’t see them going hugely further but, of course, it depends whether you are a longer term investor,” he explained. “The growth outlook isn’t outstanding and is actually quite below historical standards.”
Nevertheless, Young says he is feeling far more relaxed in his outlook because valuations remain supportive and the large majority of “hot money” has exited the market.
“We are at about 13, 14, 15 times earnings, so it’s not super cheap as we have been as low as 10, but then we have been as high as 20,” Young explained.
“I would say valuations across the market are reasonable but in our funds I think they are better than reasonable, given the quality of the companies we are investing in. Really, I’m fairly relaxed about everything because it is nice things have picked up again.”
“The good news is that the tens of billions of hot money has been sucked out and that tends to makes one a little more relaxed.”
Jonathan Pines, who manages the top-performing Hermes Asia ex Japan fund, warned investors earlier this year that valuations on higher quality, defensive companies in Asia were in “bubble” territory as investors had been paying over the odds for safety.
Pines says that cyclical stocks will materially outperform over the coming years as a result.
When asked whether he expected quality companies to outperform cyclicals over the short-term, Young said:
“‘Expect’ may be too strong as I think, over the short-term, it is in the lap of the gods,” Young said.
“However, over a longer period of time I think our companies will outperform because of their quality. It seems obvious, but what we try and do is to buy companies that are high quality and try to buy them as cheaply as possible.”
This approach has certainly worked for Young in the past.
According to FE Analytics, the Aberdeen Asia Pacific fund has returned 337.72 per cent over 20 years. The IMA Asia Pacific ex Japan sector has returned 173.93 per cent over that time.
Performance of fund versus sector over 20yrs
Source: FE Analytics
It has also outperformed the sector in seven out of the last 10 calendar years, the exceptions being 2006, 2007 and 2013.
Young’s five-crown rated Aberdeen Global Asian Smaller Companies fund has been the second best performing portfolio in the sector since its launch in March 2006 with returns of 175.8 per cent. The fund has only underperformed in two years since its launch.
Aberdeen Asia Pacific has an ongoing charges figure (OCF) of 1.13 per cent, while the Smaller Companies funds’ OCF is slightly more expensive at 1.4 per cent.
