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The fund Sullivan and Gray think still offers good value and growth

23 July 2015

The former Miton, now Coram, duo have long been bearish on the state of the current market but say the ASEAN region is an area they are “getting excited about” and are eying up the JPM ASEAN Equity fund to play their theme.

By Alex Paget,

News Editor, FE Trustnet

The ASEAN, or Association of Southeast Asian Nations, region is one of the most attractive areas of the global equity market in the current environment, according to Coram’s James Sullivan, as it is one of the very few markets which hasn’t been swept away by the effects of quantitative easing.

Sullivan launched his Coram Global Defensive, Balanced and Opportunities funds earlier this year after a number of years at Miton, where he managed a variety of multi-asset portfolios with star manager Martin Gray.

The duo have long held the view that extraordinary monetary policies such as ultra-low interest rates and unprecedented amounts of quantitative easing (QE) have done little for the underlying economy but created huge, and potentially dangerous, distortions in financial markets.

This led them to run very defensive portfolios compared to their peers, and while they have decent long-term track records, this cautiousness acted as a headwind to performance as recent years have been characterised by stellar gains from risk assets.

The graph below, for instance, shows the performance of their CF Miton Special Situations (now Cautious Multi Asset) fund during their final three years at the firm.

Performance of fund versus sector between Feb 2011 and Feb 2014

 

Source: FE Analytics

Sullivan and Gray are back running portfolios together and are still maintaining a more cautious stance, which has so far worked in this year’s more turbulent conditions as their offshore Coram Global Opportunities fund has comfortably outperformed its sector average since launch.

Performance of fund versus sector since launch

 

Source: FE Analytics

While their portfolios are skewed towards more defensive assets such as cash, money market funds, short-dated bonds and gold, Sullivan says there are still (albeit limited) opportunities available to investors.

“The vast majority, if not all major stock markets, have been huge beneficiaries of loose monetary policy,” Sullivan (pictured) said.

“Without QE-led policy, I have little doubt markets would still be far below their previous peaks. Three primary reasons - 1) currency debasement has supported corporate earnings; 2) cheap liquidity has been in abundance; and 3) negative real rates have made equities the least worst asset class.” 


 

“I’m not wanting to be overly critical of QE, just observational. That said, I have often commented that QE has been wide reaching, and reached parts of the market that other policy measures couldn’t reach.” 

He added: “However, when one observes some of the extremities, there are clear laggards.” 

An area he says has been “left behind” is the emerging markets and more specifically the ASEAN region.

According to FE Analytics, over the past three years the FTSE ASEAN index has returned 3.77 per cent compared to an 8.01 per cent gain from the MSCI Emerging Markets index and a stellar 54.89 per cent return from the developed market orientated MSCI World index.

Performance of indices over 3yrs

 

Source: FE Analytics

“It is an area we have invested in before and are getting excited about once again,” Sullivan said.

“It isn’t without risk – both equity and currency risk is apparent – but when we consider sterling is a multi-year high against the Singapore dollar, the Malaysian ringgit, the Indonesia rupiah and strong against the baht and peso, the currencies themselves offer something different for our portfolio.”

“However, as I have written recently, we remain observant about the consequences of a $9trn carry trade unwind. That remains the most unpalatable risk.”

Sullivan says that not only do the ASEAN currencies offer decent value, but given the UK current account deficit is the greatest since records began, he and Gray want to diversify their currency exposure away from sterling.

He says, apart from decent growth rates and undervalued stock markets, there are other positives surrounding the region.

“Accepting that GDP and stock markets do not move in lockstep, we can observe that the ASEAN economies growth rates continue to outpace develop markets year on year, and perhaps also China (assuming their data is somewhat less reliable).” 

“If growth rates are sustained, the ASEAN bloc will overtake the EU within 10-15 years which is quite a remarkable thought, although we’ve heard such statistics in the past that haven’t come to fruition, so remain rather realistic on this playing out.” 

“The ASEAN Economic Community – which intends to create a single market for the free flow of good and labour – should be signed off by the end of 2015, which would confirm it as the seventh largest economy in the world.”

Sullivan hasn’t implemented the trade within his portfolios just yet, but the fund he is eying up to play the region is JPM ASEAN Equity.


 

The $816m fund, which sits in the FCA offshore universe, has been managed by Pauline Ng since its launch in September 2009. Over that time, it has beaten its MSCI South East Asia benchmark by more than 20 percentage points with returns of 94.89 per cent.

Performance of fund versus index since launch

 

Source: FE Analytics

The fund has tended to be more volatile, however, and has delivered bigger drawdowns than the index. For example, since the ‘taper tantrum’ in May 2013 (when the US Federal Reserve warned the market it would reduce QE) the fund is underperforming with losses of close to 20 per cent.

Currently, Ng is overweight Thailand and Indonesia, but underweight Singapore and Malaysia relative to her benchmark. Her big sector bets include financials, industrials and healthcare and she also holds 5.3 per cent in cash. JPM ASEAN Equity has a clean ongoing charges figure (OCF) of 0.95 per cent.

Sullivan added: “In summary, the unification of the 10 member states, higher growth rates, a younger population, modest debt to GDP ratios and ‘undervalued’ currencies all add up to a quite enticing investment opportunity.” 

“Not without risk and potential volatility, but with a medium-term outlook, it appears to offer something rather exciting.  Certainly something different from the rather saturated safe(r) haven developed markets.”

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