One of the top dogs that commands respect is Jason Pidcock’s Newton Asian Income fund, a £5bn fund which boasts yields of 4.16 per cent. As the graph below shows, it’s returned more than 70 per cent over five year, comfortably outpacing its sector and benchmark.
Fund vs sector and benchmark over five years
Source: FE Analytics
There’s no doubt that the fund has a history of strong performance. However, are there smaller rising stars that are being obscured by its shadow?
Launched in December 2013, Edmund Harriss' Guinness Asian Equity Income fund is a relative minnow with assets of just $400,000. However, it certainly packs a punch and, since its launch in December 2013, it’s done remarkably well in comparison with its peers.
Fund vs sectors and benchmark since launch
Source: FE Analytics
The fund sits in the often-overlooked IA Asia Pacific including Japan sector. However, it only holds a 4 per cent in Japan, so all of its outperformance can’t be attributed just to the rallying country.
Guinness Asset Management investment analyst Mark Hammonds believes the fund’s minute size makes it an enticing opportunity.
“People are perhaps tending to look away from the bigger names and looking for slightly less well-known boutique asset managers that can provide a real point of differentiation for their clients, so we do have an advantage in that sense,” he said.
“I think the main thing that gives us an advantage over our peers is that we have a very vigorous well-defined transparent process, which is to look for persistently high return on capital. So that is a clear differentiation from our peers.”
“We can say that this is the process by which we run the fund and this is what we stick to, and what you see is what you get.”
Hammonds also attributes the portfolio’s stellar performance to several different techniques adopted by fund manager Harriss and his team.
“We very much believe in the process of looking for high-quality companies that have achieved a persistently high return on invested capital,” he said. “So what we look for is an 8 per cent real return in cash-flow terms in each of the last eight years in Asia.”
“We see that as a sign that the company is good and has got some competitive advantages, and we also find that these sorts of companies are more likely to outperform in the future. For instance, if they have achieved ‘eight-over-eight’ then there’s an 86 per cent chance that they will do it again the next year.”
This rigorous selection process leads to a high-conviction portfolio of just 36 stocks, with low turnover and no benchmark-driven constraints on sector and regional weightings.
“These positions are all equally weighted,” Hammonds said. “What happens is we have a model weight which we will reset everything when we re-balance, which is, for example, 2.75 per cent, and then over time obviously the market moves and the positions will drift either above or below that figure until they’re re-balanced again.”
A third of the fund’s holdings are in China, with 15 per cent in Taiwan, 12.7 per cent in Hong Kong and 11.2 per cent in Australia. However, Hammonds stresses that this isn’t indicative of their opinions on where is best to invest geographically.
He said: “We’re bottom-up investors so we look at individual companies’ fundamentals, but we are generally seeing better opportunities in countries like China and Taiwan, where we’re quite heavily weighted.”
“We find that our portfolio is a good mix of allocation between developed and emerging markets. We have about 62 per cent in emerging markets and 36 per cent in developed markets on a country-allocation basis.”
Asia racked up solid growth in 2014 and is continuing to succeed at the moment. But naysayers could argue that there is little room left for growth in the region, and that inevitably, what comes up must go down.
“We think that there is definitely value left in the sector,” Hammonds argued. “The companies in our universe will have had to meet the initial criteria, so we’re looking at high-quality companies to begin with.”
“But, on a general basis, if you’re looking at some of the trading P/Es that are on offer in these sorts of markets - Asia Pacific is on a 14 times P/E compared with the US, which is close to 18, and a global P/E of 17.”
“Then there are countries such as China which is down on 11 times and there are other countries where the valuations, like Taiwan and Singapore, are on 14 times. So there is value to be had, we think in Asia particularly.”
Performance of indices over five years
Source: FE Analytics
Hammonds also highlights a number of macroeconomic reasons why Asia Pacific is proving an attractive hunting ground at the moment.
Hammonds said: “We do think that Asia Pacific is a special case as a region, in the sense that the supply chains in the region are highly integrated so a lot of traders are between nations shipping things back and forth as part of the supply chain.”
“We see the Asia Pacific region as one of the consumer segments that is broadening and deepening, and that’s actually causing an increase in wealth and development in the region.”
“Because of this, the economies are moving away from commodity-led growth which is good because, when you face problems such as the oil price drop, then those countries which are particularly reliant on that, are going to face difficulties. In contrast, those that have got sustainable growth in a consumer society are potentially going to do better.”
FE Analytics shows the fund is the best performing income funds in both Asia Pacific sector since launch, returning more than the likes of Schroder Asian Income, Invesco Perpetual Asian Equity Income, Newton Asian Income, Liontrust Asia Income and Schroder Asian Income Maximiser.
It is also one of the leading Asian funds when it comes to annualised volatility, maximum gain and risk-adjusted returns, as measured by the Sharpe, Sortino and Treynor ratios.
However, Parmenion senior investment manager Meera Hearnden warns that its small size and fledgling status could prove off-putting to some investors.
“We typically wait for a fund to have a three-year track record and assets under management of around £150m before we invest,” she explained.
“The reason for this is to remove some of the risks involved in investing in small funds; the main risk being that we want to avoid becoming a significant holder of the fund which would be very easy at only a fund size of $400,000.”
“If we needed to exit the fund, it could potentially lead to liquidity issues as well as large spreads or unfavourable dilution levies.”
However, Hammonds points out that the firm’s global equity process is well established.
“We launched this fund in 2013 to demonstrate our confidence in the process that our global equity team use. They have launched a new fund just last October, which is the Global Innovators fund, and they’ve already raised about $40m into that,” he said.
“That is on the back of a larger fund in the US mutuals fund business, but we are hoping that we can achieve a similar success now that we’re becoming more well-known and the brand is becoming more recognised.”