The shift from the outperformance of growth stocks to more value-oriented companies has also played out in Asia, according to Matthews Asia manager Sharat Shroff.
Shroff – manager of the $345.6m Matthews Asia Pacific Tigers fund – says value stocks have outperformed in recent months, leading to some underperformance of his quality growth-focused fund.
“In the past six months we saw what would have been a divergence between what might be perceived as value-type stocks and quality growth companies in the region,” he said.
“That divergence has been one of the key factors in underperformance over the past six months.”
Value vs growth over the past 6mths
Source: FE Analytics
With an investment objective of achieving long-term capital appreciation through investment in an all-cap portfolio of quality growth companies, the fund has seen some impact.
Over the past six months the four FE Crown-rated fund has returned 3.08 per cent, compared with an 8.60 per cent rise for the MSCI AC Asia ex Japan benchmark and an 8.26 per gain for the average IA Asia Pacific ex Japan fund.
Shroff continues to believe in the long-term investment approach, continuing to seek out new growth opportunities rather than tilting towards value stocks.
Its largest exposure is to Chinese and Hong Kong equities, making up 33.2 per cent of the portfolio combined, although this represents a 10.6 per cent underweight to the benchmark.
The fund’s largest overweight is towards Indian stocks, which represent 19.4 per cent of the portfolio compared with 9.7 per cent of the benchmark.
“The portfolio does have a solid lean towards emerging parts of Asia,” said Shroff. “Singapore is near zero, China and Hong Kong are very light. We have exposure to India and Indonesia as well as companies in Vietnam.
“These are more emerging parts of Asia with slightly better growth and that is where it tends to be leaning towards.
“When you look at economies like India and Indonesia there are opportunities to enhance the productivity of the economy,” he said. “But that will only come off the back of substantial reforms to lower the cost of doing business.
“The risk they have is if reforms are not pursued either by complacency or inability to carry reforms out that would be a lost opportunity.”
The bottom-up, benchmark-unconstrained approach has paid off over the longer term. The ability to invest in small and mid-cap stocks also allows it to invest in some of the region’s up-and-coming companies.
Shroff – who oversees the fund alongside deputy manager Rahul Gupta – has a strong track record during his tenure of the fund, achieving a 67.16 per cent return over the five years to 17 February 2017.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Indeed, the fund has outperformed the average sector fund’s 52.59 per cent gain and the 52.09 per cent return for the index.
Yet there have also been other pressures for the market to absorb.
The first act by Donald Trump as president was to scrap US participation in the Trans Pacific Partnership (TPP), a trade deal involving 12 nations including some of Asia’s top economies and others such as Canada, Australia and New Zealand.
Shroff said: “The TPP was to improve trading and economic relationships between the 12 countries that participated in the agreement.
“There were wider benefits through government procurement investment opportunities across different economies.”
He added: “Some estimates suggest that the countries [involved] would have enjoyed significant benefits from TPP. Now it’s been cancelled those opportunities are no longer there.
“It doesn’t preclude those economies from agreeing bilateral agreements with the US.”
Participation in the agreement by Asian economies was restricted to Brunei, Japan, Malaysia, Singapore and Vietnam limiting some of the impact of the scrapping of the agreement.
Indeed, the MSCI AC Asia Pacific index has continued to climb in 2017 and is up by 23.19 per cent in the past 12 months to 17 February.
Performance of index over 1yr
Source: FE Analytics
Shroff says exit from the deal by the US is unlikely to have a huge impact on Asian economies in the long-term.
“It doesn’t preclude those economies from agreeing bilateral agreements with the US,” he said. “I wouldn’t say all is lost or [that it is] a big negative for countries in Asia.
“From a Chinese perspective the fact that TPP has now been cancelled is a clear opportunity for them to extend influence across the region.”