“There are better managed companies in Australia,” he said. “I do think there’s a lot of value in Australia so I am comfortable to remain overweight. We’re happy with how our investments are doing operationally and the recent fall in the Aussie dollar will, at the margin, be positive for a number of the companies.”The MSCI Australia index had a volatile 2013, shedding most of its early gains to end the year up 2.23 per cent.
This compares to a stellar 20.81 per cent gain from the FTSE All Share.
Performance of indices since start of 2013
Source: FE Analytics
So far this year, the index is up 1.32 per cent, ahead of the FTSE All Share which is down 3.73 per cent.
However, the country’s stock market had a shocker last month when companies shed $90bn off the books and the market plummeted nearly 12 percentage points from 8 September 2014 to 29 September 2014.
Performance of index in September
Source: FE Analytics
The drop was blamed on dramatic falls in the nation’s currency and iron ore, creating a drag that pulled the wider equity market down.
However, Pidcock thinks there are still good opportunities to be had in Australia and the sell-off indicated these companies can be snapped up at cheaper valuations.
Pidcock holds 35 per cent of the five FE Crown-rated Newton Asian Income fund in Australia, though he says he’s going to try and keep his Aussie exposure below 40 per cent.
The manager has in fact increased his exposure to Australia, snapping up contract services company Spotless at IPO, since the start of the year when he said he was betting big on Australia in the fund in spite of its poor performance in 2013.
However, Mark Williams, manager of the Liontrust Asian Income fund, is taking the opposite view on the Pacific nation, arguing that returns are likely to be weak.
Williams has just 13.8 per cent of his fund invested in Australia – the third highest weighting in the portfolio.
He and co-manager Carolyn Chan instead favour stocks in Hong Kong, at 23.1 per cent, and mainland China, at 16.4 per cent.
“September has seen a material decline in the Australian dollar against the US dollar which as I am writing on 25 September has fallen 5.8 per cent and is now 7.2 per cent lower than this year’s peak,” he explained.
“The equity returns year-to-date are marginally negative in US dollar terms and we see no reason to increase our relatively low exposure to the market given the negative dynamics are likely to continue.”
“We are cautious and believe there are downside risks for a broad based recovery.”
Performance of Aussie dollar and US dollar over 1 year
Source: FE Analytics
However, Pidcock says that while the Aussie dollar has fallen sharply against the US dollar, it’s not alone and highlights the fact that it hasn’t declined significantly against sterling, the euro or the yen recently.
“It will be affected by commodity moves but we see it as intrinsically a ‘hard’ currency which will hold up over time because it’s not being debased to the extent of the other majors,” he said.
“When equity markets around the world are moving in tandem [or have high correlation], Australia won’t be immune, but we expect it to recover faster than many others when things settled down.”
The long-term performance of the Newton Asian Income fund is stellar, having outperformed both the IMA Asia Pacific ex Japan sector and the FTSE Asia Pacific ex Japan index by more than 40 percentage points over five years.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
However, the fund was hard hit at the end of 2013 by a shock fall in the share price of New Zealand-based telecommunications provider Chorus, which made up a small percentage of the Newton fund, and Newton Asia Income’s one-year figures have lagged its peers and the market.
But Pidcock says New Zealand has re-rated on the back of its general election in September and the country has been a contributor to performance so far this year.
Year-to-date the fund is up 8.95 per cent, slightly ahead of the FTSE Asia Pacific ex Japan sector, which is up 7.33 per cent, and the sector, up 6.79 per cent, according to FE Analytics.
Newton Asian Income has ongoing charges of 0.82 per cent and yields 4.47 per cent.
