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Why experts don’t mind that First State Asia Pacific Leaders is nearing £8.5bn

12 March 2015

The size of the First State Asia Pacific Leaders fund has grown significantly over recent years so should investors approach this sector-leading portfolio with an air of caution?

By Gary Jackson,

News editor, FE Trustnet

Fund size is an issue that FE Trustnet and most investors have a keen eye on but one fund that has shown the ability to keep outperforming despite growing assets under management (AUM) is First State Asia Pacific Leaders.

The five FE Crown-rated fund, which is headed by FE Alpha Manager Angus Tulloch (pictured) and Richard Jones, is a persistent favourite in the IA Asia Pacific ex Japan sector but investors will have noticed that its assets has swelled in recent years and are now approaching the £8.5bn mark.

This may prompt some to wonder if the portfolio is growing too large – and it wouldn’t be the first time the fund’s size has been subject to scrutiny.

In 2012, when the fund was £5.4bn in size, First State said the fund would not be listed on any new platforms while the manager told investors during a conference call that he was seeking to limit inflows into the fund.

There were reports in March 2013 that First State had stopped actively marketing the fund and was asking wealth managers not to make large scale investments in the product. It was then £7.4bn in size.

AUM dropped to around £5.8bn by March 2014 but more than £2.5bn has been added to that figure since. Its managers also run segregated mandates, so the size of the actual strategy is higher and the fund's ideas may crop up in other portfolios.

Data from FE Analytics shows it is the most popular fund in the IA Asia Pacific ex Japan sector, taking in net inflows of around £525m over the past 12 months. The next most popular of its peers – Newton Asian Income – took £275m in fresh money over the same period.

It’s not difficult to see why the fund is a standout choice for investors. It’s currently first decile over one, three and five years, while turning in first or second quartile gains in eight of the past 10 full calendar years.

Since launch in December 2003 the fund is the second best performer in the sector with a 409.74 per cent return, against a peer group average of 237.34 per cent and a rise in the MSCI AC Asia Pacific ex Japan benchmark of 251.56 per cent.

Performance of fund vs sector and index since launch

 

Source: FE Analytics

It’s worth noting that the only fund which has beaten it over this time frame is First State Asia Pacific, which is also run by Tulloch alongside FE Alpha Manager David Gait. First State Asia Pacific, which is £839.6m in size, is soft-closed and shows the firm is not afraid to close strategies when they reach capacity.


Given the nature of First State Asia Pacific Leaders and its focus on larger companies – it avoids investing in stocks with a market cap below $1bn – it can have a higher AUM than First State Asia Pacific, which invests across the cap spectrum.

According to Style Research, 49 per cent of Asia Pacific Leaders is in mega-caps, 47 per cent is in large-caps and just 4 per cent is in mid-caps; First State Asia Pacific has 32 per cent in mega-caps, 38 per cent in large-caps, 23 per cent in mid-caps and 7 per cent in small-caps.

When asked about Asia Pacific Leaders’ capacity, First State said it is an issue it “continues to monitor”. The group also points out that the recent jump in size is down to performance increasing the net asset value rather than from inflows.

FE Analytics shows that while inflows have lifted the fund’s AUM by £525m over the past year, the performance effect has added close to £2bn.

Despite its growing size, the investment community continues to back the fund, pointing out that its bias towards large, mainly defensive companies means capacity is not too much of an issue.

The fund is in the aggressive, balanced and cautious AFI portfolios built by FE’s panel of investment advisers and is found in dozens of multimanager portfolios, including John Chatfeild-Roberts and Algy Smith-Maxwell's Jupiter Merlin Worldwide and Bill McQuaker’s Henderson MultiManager Active.

Laith Khalaf, senior analyst at Hargreaves Lansdown, argues that investors do not need to worry about First State Asia Pacific Leaders’ size, adding that Tulloch and his team “are simply a class outfit who have proven themselves over a long period”.

He added: “First State have taken measures to close their funds in the past which shows they are willing to take this step if they feel size is hampering performance. The worry is there will come a time when they do that, so investors looking for exposure to this area more want to think about getting in before the door shuts, whenever that might be.”

FE Analytics shows the fund tends to have minimal turnover activity in its top 10 holdings. Richard Philbin, chief investment officer at Harwood Capital, says details like this can be useful in determining how much of an issue size is.

“When looking at capacity, it is also useful to look at turnover rates,” he explained. “If, for example, the £8.4bn fund has 10 per cent turnover, you should be aware that the dealers only have to place £840m per year. If the assets they are buying are large, liquid, blue-chip names then this shouldn’t be an issue.”

First State Asia Pacific Leaders is also a member of the FE Research team’s Select 100 list of preferred funds, where the cautious approach of the managers is highlighted as key differentiator from the typical Asia bull found in their peer group.

“Tulloch and Jones are likely to maintain a conservative stance, as they believe that taking on additional risk is unlikely to be rewarded in the current market. The managers are concerned about the longer term impact of quantitative easing and creation of bubbles in the Asia Pacific region,” FE’s analysts said.

“They continue to focus solely on companies with strong balance sheets and a business model they fully understand, which should maintain their high quality of risk control. This approach should help the fund in uncertain markets, although it will lag behind if the global economy quickly recovers.”

It also top a top AAA rating from Square Mile Investment Research & Consulting. The team there said: “The investment process has been consistently applied to similarly managed strategies since 1992.”

“Since its launch in 2003, this fund has delivered a very strong track record but the emphasis on capital preservation and quality means it has lagged when the market is led by more cyclically sensitive and lower quality stocks. Such stocks tend to be found in sectors such as industrials and materials. The upside to such an approach is that the fund has remained remarkably resilient when markets have fallen and volatility has increased.”


Square Mile also notes that the fund has attracted “a considerable level of assets” on the back of this performance but doesn’t flag up any potential problems stemming from this.

Data from FE Analytics also suggests that the fund’s ability to outperform has not been hampered by its growing size. The graph below shows First State Asia Pacific Leaders’ excess return, calculated on a rolling six-month basis, since inception.

Fund’s rolling six-month excess return since launch

 

Source: FE Analytics

The graph suggest the fund’s ability to deliver returns above those of the MSCI AC Asia Pacific ex Japan index have not fallen over recent years and are around, if not better, than its historical average. A similar picture can be seen when the fund’s alpha generation and information ratio are examined in the same fashion.

First State Asia Pacific Leaders has a clean ongoing charges figure of 0.90 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.