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The best Asia Pacific funds for downside protection

26 November 2014

In the first of a new series FE Trustnet reveals the funds in a particular sector – this time Asia Pacific ex Japan – that have demonstrated a better ability than their peers to protect investor capital over the longer term.

By Daniel Lanyon,

Reporter, FE Trustnet

Bearishness has become an increasingly common feature in the investor landscape in 2014 with growing macroeconomic concerns and high valuations arguably making capital protection a greater priority for many investors and advisers.

 

While markets shrugged off this mounting concern and a host of other macro factors, including tapering of quantitative easing and a likely rate rise just around the corner, for most of the year markets have bounced around and faced the occasional sell-off.

 

Geo-political events also continue to be a theme knocking back sentiment, with crises in Iraq, Syria and the Ukraine adding further worry to markets across the world.

 

In the region examined in this study – Asia Pacific – the outlook has started to look bleaker despite a pledged package of economic reforms and a bold quantitative easing programme coming out of recession-hit Japan.

 

While the long-term case remains for investing in the region, with earnings expectations now at “a more realistic level” than at the start of the year and valuations looking attractive, risks remain in the shorter term, according to Andrew Graham, manager of the Martin Currie Asia Pacific fund.

 

“Asian markets are facing a number of real challenges both at a country and global level. The consequences of geo-political risk loom large, as does the prospect of normalising interest rates in the US with the potential negative knock-on effect on Asian currencies and fund flows,” he said.

 

In the region’s largest economy – China – pessimism has proliferated of late as commentators worry that slowing growth will produce a ‘hard landing ‘and imminent crises are set to spring from the country’s shadow banking sector and high growth property market.

 

According to FE Analytics, the MSCI Asia Pacific ex Japan index and the average fund in the IMA Asia Pacific ex Japan sector have seen rapid growth together with high volatility over the past seven years, which includes the financial crisis.

 

FE Alpha Manager John Chatfeild-Roberts, who manages Jupiter’s Merlin fund of funds range with fellow FE Alpha Manager Algy Smith-Maxwell, says assessing how a manager handles the downside is vital when buying a new fund.

 

“Downside protection is the most important thing to look at first,” he said.

 

While past performance is not necessarily a guide to the future, FE Trustnet is kicking off a series looking at funds that have fared best at defending investor capital over the seven years of the past market cycle.

 

Looking at several key metrics – maximum drawdown, the Sortino ratio and how low a fund’s underlying beta is relative to the index – there are six funds which score top or second decile for each of the three measures over three years.

 

The Sortino ratio, very similar to the Sharpe ratio, assesses risk-adjusted returns with a greater perspective on the downside.

 

Top of the list is the $4bn Aberdeen Global Asian Smaller Companies fund. It scores top of the sector – out of 61 companies – for all three metrics.

 

It is also top quartile over three and five years in total return terms and is top of the sector over seven years. Over this period it has returned 155.05 per cent while the sector average was 44.43 per cent and the MSCI Asia ex Japan index gained 46.15 per cent per cent.

 

Performance of fund vs sector and index over 7yrs

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Source: FE Analytics


 

The fund has an ongoing charges figure (OCF) of 1.4 per cent.

 

Next up are three First State offerings: the £400m First State Asia Pacific Sustainability fund, co-managed by FE Alpha Manager David Gait and Sashi Reddy; the £800m First State Asia Pacific fund, co-managed also by Gait and FE Alpha Manager Angus Tulloch; and Tulloch’s behemoth $7.6bn First State Asia Pacific Leaders fund.

 

The three funds have a high exposure to consumer stocks and financials, all having approximately 45 per cent in the two sectors.

 

Over seven years the three funds are in second, third and fourth places from a total return perspective, comfortably beating the index and sector average by 50 percentage points in the case of First State Asia Pacific and First State Asia Pacific Leaders and 100 percentage points when it comes to First State Asia Pacific Sustainability.

 

Performance of funds vs sector and index over 7yrs

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Source: FE Analytics

 

However, all are now soft-closed to inflows from new investors. While investors will still be able to gain to access to the funds, it means an initial 4 per cent charge on top of their respective OCF.

 

First State Asia Pacific has an OCF of 1.05 per cent, Asia Pacific Leaders 0.89 per cent and First State Asia Pacific Sustainability 0.98 per cent.

 

Jason Pidcock’s $4bn Newton Asian Income fund is the next on the list after sitting top decile for Sortino ratio and second decile for max drawdown and beta.

 

It has returned 105.97 per cent over the past seven years, more than double the sector average and the return of the index. 

 


 

Performance of fund sector and index over 7yrs

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Source: FE Analytics

 

However, it has underperformed in 2014 leading several managers to say it is suffering from capacity constraints.

 

It has an OCF of 0.82 per cent.

 

Schroder Asian Income - at £545m - is one of the smallest funds to feature in this article. Managed by Richard Sennitt, it is top decile for downside risk and Sortino ratio and second decile for max drawdown.

 

It is the sixth best performer over seven years having returned 99.39 per cent.

 

Performance of fund sector and index over 7yrs

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Source: FE Analytics

 

Sennitt has been at the helm since November 2001, since which he has built up a strong reputation for outperformance and capital preservation, which is due to his preference for dividend paying companies.

 

The fund’s largest holdings currently include HSBC, China Bank and Amcor. It has an OCF 0.94 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.