There are over a dozen Asian equity strategies that have vastly outperformed their peers when broader markets are rallying, according to data from FE Analytics taken over the past five years.
Many high-growth technology stocks in Asia have been hit hard by higher inflation expectations over the past year.
Similarly, Chinese stocks have also struggled over the period due to the country’s zero-Covid policy and government crackdown on industries such as technology and video gaming.
China’s economy has also been weighed down by its Covid lockdowns which have confined millions of people to their homes in major cities. Shanghai – one of the country’s financial, manufacturing and shipping hubs – has been in lockdown for more than three weeks.
What happens in China has an impact on the wider region due to its vast economic and political influence. It also matters because the country makes up more than a third of the MSCI AC Asia ex Japan index and accounts for half of the top-10 constituents.
Against this backdrop, the broader MSCI AC Asia ex Japan index has underperformed global equities by almost 25% over the past twelve months.
Performance of MSCI AC Asia ex Japan vs MSCI World over 1yr
Source: FE Analytics
However, long-term investors who are seeking exposure to Asian equity markets might view the recent weakness as a potential buying opportunity, with the hope that the market can turn bullish in the short to medium term. Yet not all funds in the region provide the same upside exposure.
There are some Asian equity funds that have rallied much more than others when markets move upwards – as indicated by their upside capture ratio. This ratio measures the percentage of the market gains captured by a fund during periods of market strength.
Of the 110 equity funds within the Investment Association’s IA Asia Pacific Excluding Japan sector, there were 14 funds that had an upside capture ratio of 125 or above – meaning they outperformed their peers by more than 25% when markets were moving up.
Source: FE Analytics
Given the recent poor performance of the region, many of the funds in the list above are down double digits year-to-date.
Over the past five years however, all the funds above – except for Waverton Asia Pacific – have comfortably beaten the five-year return of the MSCI AC Asia ex Japan index return of 31.6%.
The fund with the highest five-year return (to last month end) was the Baillie Gifford Pacific fund, managed by Roderick Snell and Ben Durrant.
This long-term growth strategy has delivered a total return of 112.6% over the past five years and had the highest upside ratio amongst the group above of 187.8, meaning it has outperformed its peers by 87% when markets have rallied.
By contrast, its downside capture ratio – which measures how much it outperforms or underperforms during down markets – was relatively lower at 101.2.
It is worth noting that all but two funds in the list above have exhibited a downside capture ratio over 100, meaning that they fell relatively more than their peers during declining markets.
The two exceptions were the Fidelity Asia Pacific Opportunities fund and the Veritas Asian fund, which had a downside capture ratio of 91.9 and 95.1 respectively. This means that these two strategies fell by less than their peers during down markets.
Five of the funds in the list above had FE fundinfo five-crown rating, which puts them within the top 10% of funds in terms of their outperformance of their benchmark over three years.
These were BNY Mellon Oriental, Barings Eastern Trust, Baillie Gifford Pacific, Veritas Asian and Fidelity Asia Pacific Opportunities – the latter three of which are run by FE Alpha Rated Managers.
There were two other funds in the list also run by FE Alpha Rated managers, but were four-crown rated, namely JPM Asia Growth and Nomura Asia Ex-Japan High Conviction.
A four-crown rating puts these funds in the top 25% of funds based on their relative performance over the past three years.
The only funds in the sector that have delivered a positive performance year-to-date are those that are overweight Australian equities or are income-focused strategies.
Year-to-date, Australian equities have benefited from rising commodity prices as most of the index is made up of commodity producers which have had their bottom lines directly boosted by rising prices.
Elsewhere, income-focused strategies have also fared relatively well compared to their growth counterparts amidst rising inflation expectations and interest rate hikes.
However, nearly all these strategies over the past five years have exhibited an upside capture ratio of between 80 and 90 – meaning when markets have rallied, they have not gained as much as the wider peer group.
But for investors who value lower volatility than the wider sector, income-focused strategies have also exhibited the lowest downside capture of the peer group: with the lowest 10 funds exhibiting a downside capture ratio of between 75 and 85.
Source: FE Analytics
Here, the likes of FSSA Asia Focus, Jupiter Asian Income and BNY Mellon Asian Income have proven adept at navigating down markets, while their upside has been serviceable during rallies.