A host of headwinds have knocked back investor sentiment to the Asia Pacific region over the past year with markets still down after last May’s ‘taper tantrum’, when investors jettisoned risk assets on hints that the Fed was planning to wind up its quantitative easing programme.
Performance of index since 22 May 2013
Source: FE Analytics
Crises in China’s shadow banking sector and housing market have added to worries about a slowdown in the overall rate of growth of its economy following a decade of rapid expansion.
While investing in Asia has been unpopular in recent years, with 2013 and early 2014 seeing mass outflows from funds, sentiment seems to have picked up in recent months but some of the most popular funds have soft-closed or tried to stem inflows due to the need to protect existing investors.
Here, Tepes and Tan suggest two nimble trusts to replace the £7.5bn First State Asia Pacific Leaders and the $2.5bn Schroder ISF Asian Total Return funds.
Asian Total Return
Tepes says this £152m trust offers access to the “highly successful and unique” total return strategy employed in the Schroder ISF Asian Total Return fund, which has been soft-closed to investors since 2010.
Both the fund and trust are co-managed by King Fuei-Lee and FE Alpha Manager Robin Parbrook. However, while the pair have been at the helm of the fund since November 2007, they only took charge of the trust in March 2013.
The trust is down 0.63 per cent since the pair took over compared to an IT Asia Pacific ex Japan sector average return of 2.67 per cent and a gain of 5.84 per cent in the MSCI AC Asia ex Japan index.
Performance of trust, sector and index since March 2013
Source: FE AnalyticsHowever, Tepes say the managers’ track record over the longer term is outstanding with the strategy adopted vastly outperforming from total return and volatility points of view.
Since Fuei-Lee and Parbrook took over the Schroder ISF Asian Total Return fund they have returned 157.08 per cent, compared to a gain in the MSCI Asia ex Japan index of 42.37 per cent.
Performance of fund and index since November 2007
Source: FE Analytics
Tepes says the strategy’s success meant that the fund grew quickly in size, through both asset performance and fund inflows.
“The strategy, launched in November 2007, is unique in that it has an absolute return approach combining a bottom-up portfolio with a top-down derivatives macro overlay, has an outstanding track record of strong outperformance and, even more impressively, lower volatility.”
She also says the trust’s closed-end structure and its nimble size gives the managers more investment flexibility, such as the ability to scoop up smaller cap stocks, currently about 25 per cent of the portfolio, and also benefits investors with lower fees.
The trust is currently on a 9 per cent discount but the shares are likely to stay around par due to a recent commitment from the trust’s board to buy back shares, Tepes says.
“The board believes that if it issues shares - as it did last summer when the trust was trading at a premium - then it is duty bound to buy back shares when a discount appears, in normal markets at least,” she explained.
“It has therefore stated its commitment to use buy-backs with a view to keep the shares trading as close to par as possible.”
It has an ongoing charges figure [OCF] of 0.77 per cent and no gearing.
Pacific Assets
Tan recommends this £224m trust for exposure similar to the First State Asia Pacific Leaders fund, which, while not fully soft closed, has been making efforts to stem inflows following huge growth in recent years.
The Pacific Assets investment trust has a similar team at First State and employs a similar strategy to the open-ended fund, Tan says.
While First State Asia Pacific Leaders is headed by star manager Angus Tulloch and the Pacific Assets investment trust is managed by David Gait, the two have a similar style and share resources and ideas through First State’s Asia team.
The trust has returned 74.42 per cent over the past three years compared to an average return in the sector of 34.97 per cent and a gain in the MSCI Asia ex Japan index of 25.23.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
Pacific Assets has a large overweight position in Indian equities, which have rallied strongly this year on the back of recent elections. The region makes up 31 per cent of the NAV and four Indian companies feature in its top 10.
The trust is currently on a 2.6 per cent discount, has a performance fee and has no gearing. It most recent OCF including performance fee was 1.94 per cent.