The negative sentiment towards emerging markets saw the average IMA Asia Pacific ex Japan fund make just 1.85 per cent last year. Over the same 12 month period, global equities, measured by the MSCI AC World index, made more than 20 per cent.
The sector has seen much improvement in 2014 however, up 6.67 per cent year-to-date. Horrocks (pictured) says the tide is starting to turn in favour of Asia, with investors finally distinguishing them from emerging markets more generally.“At the end of last year, investors were treating Asia as simply another emerging region at the mercy of the twists and turns of US economic performance and monetary policy,” he said.
“But things seem to have changed over the last six months – at least that is the impression that I have received from investors across the world.”
“There is more willingness to think of Asia as a distinct region, like Europe – although it is still a radical change for some investment frameworks – and there is a growing understanding that all emerging markets are not created equal.”
Horrocks says the sentiment shift is in large part due to sweeping reforms from many of the major countries in the region.
He highlights leadership changes in China, Japan and India, where reformist governments have taken the helm and begun implementing economic reforms to the delight of markets, as particularly influential.
“Yes, there is a vast element of demand stimulus in Abenomics (in Japan), but there is also much more emphasis on the supply side – labour force reform, corporate government and financial reform,” Horrocks said.
“In China, financial reform, too, seems to be at the heart of policy as China tried to improve the pricing of risk and the allocation of capital across its private economy.”
“Modi’s ascent to power in India has been greeted with comparisons to Ronald Reagan and Margaret Thatcher. And if he is successful in achieving, on a national scale, what he did in his home state of Gujarat, then India should see a wave of productivity growth.”
“So as one half of the world tried to get the filling back into the pie, the other half is busy trying to grow the pie.”
Another compelling reason for investing in the region is record low valuations, which he says remain at a discount to long-term averages on a variety of measures including price-to-earnings, price-to-book and dividend yield.
“In Asia, equities look unequivocally cheap, relative to the rest of the world,” he said.
Though Horrocks pinpoints a strong US dollar and high levels of inflation as potential headwinds, he says he is encouraged that corporate earnings growth appears to be holding up fairly well, and that politicians are trying to deal with the region’s weaknesses.
“I remain optimistic in the light of Asia’s growth prospects and a reasonable cushion from valuations,” he added.
Investors who want access to Asian equities can go through a number of different avenues.
For those who want a pure growth play in Asia, Rob Gleeson’s FE Research team like the four crown-rated Schroder Asian Alpha Plus fund, run by Matthew Dobbs.
The £504.3m fund aims to maximise capital growth through investment in listed companies in the Asia ex Japan region.
“Dobbs is optimistic about the growth of Asian markets, despite the tough environment caused by the situation in Europe,” FE Research said.
Though the portfolio was hard hit by the 2008 financial crisis at launch, the subsequent years have been successful and FE Research point on the fund has proved itself to be as resilient in falling markets as reactive in rising ones.
Since launch, the fund is up 71.22 per cent, ahead of both the IMA Asia Pacific ex Japan sector and the MSCI Far East ex Japan index.
Performance of fund vs sector and index since launch
Source: FE Analytics
Schroder Asian Alpha Plus has ongoing charges of 0.94 per cent.
From an income perspective, investors may want to consider the five-crown rated Newton Asian Income fund, headed up by Jason Pidcock.
The fund, part of the FE Select 100 list of recommended portfolios, has a 4.58 per cent dividend yield, making it one of the highest yielding funds in the IMA Asia Pacific ex Japan sector.
“The flow of new opportunities in Asia has been sustained, which allowed the team to add companies with regular and growing revenue in the telecom, utilities and real estate space,” FE Research said.
“This should assure investors a solid and rising income providing that Asian currencies do not collapse.”
The fund traditionally holds up better than its peers in down markets, as shown by its outperformance in 2008 and again in 2011. The portfolio was hit by unexpected events in New Zealand in the latter half of 2013, as Pidcock explained in an interview with FE Trustnet, but has since surged ahead of its peers and the index in 2014.
Since launch in November 2005, the fund is up 175.7 per cent compared to 124.1 per cent from the index. The FTSE Asia Pacific ex Japan index has returned 119.78 per cent over the period.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund has ongoing charges of 0.82 per cent.
Another growth portfolio investors may want to consider is from star emerging market fund house Aberdeen, in the form of the Aberdeen Asia Pacific Equity fund.
Manager Hugh Young and his team are a favourite with consultancy firm Square Mile, which have given it a AA-rating.
They see it as ideal for investors will one eye on capital protection.
“It is difficult to avoid the word sensible when describing the Aberdeen approach,” they said.
“The people are sensible, the process is sensible as too are the companies the fund takes positions in.”
“Hugh Young of course is very sensible as well. This fund is rarely the most exciting in what is a dynamic sector, but the risk average approach has served fund holders very well over the fund’s history.”
Since launch in December 1998, the fund has trounced the performance of the IMA Asia Pacific ex Japan sector and MSCI Asia Pacific ex Japan index, returning 586.04 per cent. It’s outperformance has slowed in recent years as Asia and emerging markets have fallen out of favour. Over five years the fund is up 62.3 per cent, in line with the index, but ahead of its peers.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
“We consider that this is a fund that can be tucked away for the long term,” Square Mile added.
The fund has ongoing charges of 1.13 per cent, the most expensive of the trio on the list.
