Small-cap biased funds such as JOHCM Asia ex Japan Small and Mid Cap, Smith & Williamson Oriental Growth and Fidelity Asia Pacific Opportunities have been the best performers in the IA Asia Pacific ex Japan sector during the recent crash, according to the latest FE Trustnet study, which also shows First State’s funds are holding up well once again.
Investors will now be well aware that Asian equities have been in freefall over recent months thanks to concerns surrounding China and developments such as the bursting of the ‘A’ (or domestic market) bubble and the devaluation of the yuan all contributing to the negative sentiment.
Of course, any talk of a ‘crisis’ should be coupled with the fact that the Chinese equity market made gains of more than 150 per cent between June 2014 and July this year. Nevertheless, its falls of 30 per cent over the past two months have still been very painful for investors.
Interestingly, though, the wider Asian market has been falling consistently since mid-April with both the MSCI AC Asia Pacific ex Japan and IA Asia Pacific ex Japan sector posting losses of close to 20 per cent over that time.
Performance of indices since April 2015
Source: FE Analytics
As the graph above shows, the Asian market was initially caught up the global equity correction (which stemmed from an uncharacteristic spike in government bond yields). However, while global indices have flat-lined more recently, Asian equities have been pushed lower by China’s woes.
While it has clearly been a tough time to be in Asian funds, data from FE Analytics shows that the perceived ‘riskiest’ portfolios in the sector have managed to weather the recent sell-off, with small-cap biased funds dominating the peer group over that time.
Source: FE Analytics
The best performing fund over that time, for example, is the £37m JOHCM Asia ex Japan Small and Mid Cap fund, which has lost just 8 per cent. The five crown-rated fund, which is headed up by Cho Yu Kooi, has also outperformed its benchmark during the correction.
This has added to the fund’s longer term outperformance as, since its launch in September 2011, JOHCM Asia ex Japan Small and Mid Cap has been the sector’s best performing portfolio with returns of 72.42 per cent, beating its benchmark by 50 percentage points in the process.
The next two best performers in the sector also have a bias towards smaller companies; namely Smith & Williamson Oriental Growth and Fidelity Asia Pacific Opportunities.
According to Style Research, the tiny £6m Smith & Williamson fund is underweight mega and large-caps as it holds more than 50 per cent in mid and smaller companies. The equally small Fidelity fund, which is helmed by FE Alpha Manager Anthony Srom, is also considerably overweight sub-$1bn market cap companies relative to the wider index.
Hugh Young and his team’s Aberdeen Global Asian Smaller Companies fund is also among the top performers with losses of 14.53 per cent.
It seems strange that smaller companies funds have outperformed during the correction, given they are often seen as higher risk relative to large-caps.
Nevertheless, there have been a number of factors driving their outperformance. Firstly, they have been largely unaffected by the China-induced selling within the exchange traded fund (ETF) market given they make up a very small proportion of the index.
On top of that, as it is a relatively under-researched asset class those who buy into Asian small-caps are doing so with a long-term view in mind and don’t tend to react or change their asset allocation in the face of short-term market noise.
However, investors will notice that it hasn’t just been small-cap orientated portfolios which have performed best during the recent sell-off as the three First State Asia funds are on the list.
The group, which is home to FE Alpha Managers such as Angus Tulloch and David Gait, has been one of the leading lights in the sector over the longer term due to calibre of its managers and its focus on high quality, cash generative growth companies.
The £740m First State Asia Pacific and £7.8bn First State Asia Pacific Leaders funds have been the top two performing funds in the sector over 10 years with gains of 250 and 240 per cent, beating the MSCI AC Asia Pacific ex Japan index by more than 100 percentage points in the process.
Performance of funds versus sector and index over 10yrs
Source: FE Analytics
The £321m First State Asia Pacific Sustainability fund, which is run along similar lines apart from a bias towards “companies who manage sustainability risks and opportunities and those with a positive sustainability impact”, has also been the best performing portfolio and comfortably beaten the index since its launch in December 2005.
Square Mile, the investment research and consultancy firm, says the group’s long-term outperformance stems from its managers’ focus on capital preservation – which also explains First State’s recent top decile numbers.
Square Mile has therefore awarded the First State Asia Pacific Leaders fund with its highest ‘AAA’ rating.
“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.”
The fund also features on the FE Select 100 and our research team says investors can expect this type of performance profile to continue.
“The managers are likely to maintain a conservative stance, as they believe that taking additional risk is unlikely to be rewarded in the current market. They are concerned about the longer term impact of quantitative easing and the creation of price bubbles in the Asia Pacific,” the team said.
“They continue to focus on companies with strong balance sheets and a business model they understand, which should maintain their high quality risk control. They also tend to stay away from the resources sector. This approach should help the fund in uncertain markets, although it will lag if the global economy quickly recovers.”
Other Asia funds to make up the list of top 10 performers during the recent market falls include Schroder Asian Income Maximiser (which is has a similar defensive style), JOHCM Asia ex Japan and Tiburon Taipan (which are both significantly underweight China and Hong King).
The worst performing fund, though, also happens to be one of the largest; namely the £6.4bn Templeton Asian Growth fund.
The fund, which is managed by emerging market guru Dr Mark Mobius, has fallen a hefty 27.68 per cent since mid April.
Performance of fund versus sector and index during correction
Source: FE Analytics
Some 75 per cent of the fund is invested in $5bn-plus companies which, along with its distinct value style, have been the major reason behind its underperformance. Mobius’ focus on value has led him to a substantial overweight in energy stocks, for example, which have taken a further hit following another fall in the oil price.
Its recent performance is relatively in keeping with its longer term track record however, as since its launch in October 2005 Templeton Asian Growth has been bottom quartile for both its annualised volatility and maximum drawdown.
