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Meet the fund that will take Aberdeen and First State’s crown

22 January 2015

Aberdeen and First State have dominated the emerging markets sector, but the experts are tipping another fund to take their place over the coming years.

By Alex Paget,

Senior Reporter, FE Trustnet

Funds with a value bias will dominate the emerging market sectors over the coming years, according to John Ventre, who says that those with a quality-growth approach – such as portfolios run by Aberdeen and First State – aren’t “best positioned to capture the new dynamic” in the developing world.

Over the past 10 years, investors have had a relatively easy decision when choosing funds for their global emerging market or Asia Pacific ex Japan exposure as they have only really ever had to turn to portfolios run by First State or Aberdeen.

Given their experienced management teams and disciplined approaches, which revolve around buying high quality companies with reliable earnings streams, the two groups have been the leading lights in the IA Global Emerging Markets and IA Asia Pacific ex Japan sectors for a very long time.

According to FE Analytics, First State Asia Pacific and First State Asia Pacific Sustainability have topped the Asian sector over three, five and 10 years while Aberdeen Global Emerging Markets and Aberdeen Global Smaller Companies are number one in the wider emerging market sector over 10 and five years, respectively.

Performance of funds versus sector and indices over 10yrs

 

Source: FE Analytics

However, due to the two groups’ success over the years, their AUMs have surged and have meant the large majority of their emerging market funds are at or near capacity.

Though investors looking for emerging market or Asia exposure may be frustrated that most Aberdeen and First State funds are now closed, Ventre – head of multi-manager at Old Mutual Global Investors – says investors should be looking at different strategies anyway.

Ventre says that as there is now a growing discrepancy in performance between different emerging market economies, like Psigma’s Tim Gregory recently noted, and as growth has worked so well over recent years, investors now need to take a value approach. 

“We have been looking for some time for some emerging market managers with a value bias. Emerging markets have really been a growth story over the last 10 to 15 years,” Ventre (pictured) said.

“In the context of a ‘de-emerging markets’ theme and as the growth outlook looks a lot less certain, while at the same time valuations looks really compelling, in turn the usual manager selection on its head.”

He added: “The very successful quality growth managers out there in the market, which we have owned historically, are probably not best positioned to capture the new dynamic in emerging markets.”

He has therefore started buying Jonathan Pines’ $1.2bn Hermes Asia ex Japan fund for his Old Mutual Spectrum range.

Ventre is a fan of Pines as he has shown his disciplined valuation driven approach, which is designed around a framework of price-to-book versus return on assets, can work even though growth has been the most popular style recently.


“He [Pines] is saying higher quality companies should trade on a premium, so let’s buy cheap quality but let’s also be prepared to buy very cheap low quality. Essentially, he believes there is right price for every risk in Asia,” Ventre said.  

“That is different to what has been the winning strategy for the last 10 years, which has been to just buy the highest quality companies – buy the compounders. The trouble is those compounders are now very expensive, so you want a good balance between cheap quality and just really cheap less good quality.”

“That has been Jon’s approach and he has made it work really well over the last three or four years, despite the fact it hasn’t actually been that friendly an environment for a value-biased manager.”

The Hermes Asia ex Japan fund launched into the IA universe in October 2012, though Pines had been running the strategy for a number of years on an institutional basis.

According to FE Analytics, it has been the best performing portfolio in the 83-strong IA Asia Pacific ex Japan sector over that time with returns of 58.8 per cent. As a point of comparison, the MSCI Asia ex Japan index has returned roughly half that amount over this time.

Performance of fund versus sector and index since Oct 2012



Source: FE Analytics

The second best performing portfolio over that time has been the five crown-rated First State Asia Pacific Sustainability fund with returns of 43.48 per cent, while the £2bn Aberdeen Asia Pacific Equity fund is bottom quartile as it is only up 10 per cent.

Hermes Asia ex Japan topped the sector in 2013, was top quartile last year and is top quartile again so far in 2015.

The fund also has the best alpha generation relative to its benchmark, Sharpe ratio – which calculates risk-adjusted returns – and maximum drawdown, which measures the most an investor would have lost if they had bought and sold at the worst possible times, in the sector since its launch.

China is Pines’ largest overweight position accounting for 43.57 per cent of his fund, nearly 20 percentage points more than that of the benchmark. He is also slightly overweight Korea, but underweight India on valuation grounds thanks to its rally last year.


FE Trustnet has spoken to Pines on a number of occasions in the past. Last year, he said the major reason why he thought his strategy was best placed to outperform was because a bubble was developing in defensive income paying stocks as investors had overpaid for safety. 

His new approach to Asian equities has been met well by fund buyers. Premier’s Simon Evan-Cook holds it in his portfolios while Justin Oliver at Canaccord Genuity has added it to his list of funds.

Square Mile have also given the fund an ‘A’ rating as it appears in its Academy of Funds. However, the research team at Square Mile says it could be used to sit alongside either a First State or Aberdeen fund, rather than as a direct replacement.

“We believe this fund differentiates itself on a number of levels, including investment philosophy, process and market cap allocation, compared to many of its better known peers and could be viewed as a complement to them,” Square Mile said.

Hermes Asia ex Japan has an ongoing charges figure of 0.86 per cent. 



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