Markets in Asia are unlikely to maintain their current level of performance over the next 12 months, according to Jupiter’s Jason Pidcock (pictured), who said individual stock selection will become more important. 
The manager, who heads up the Jupiter Asian Income fund, is therefore more cautious on macro-driven stocks and is focusing his attention on companies with steady earnings potential.
“While Asian markets are proving more resilient against external global shocks than they have been in the past, potential headwinds persist and a fundamental approach to stock picking remains, in my view, essential,” he said.
“I’m not expecting markets in Asia to do as well over the next 12 months as they have done in the past year.
“I am particularly cautious on the more cyclical sectors, and as such the portfolio does not hold any mining companies or energy producers.”
Pidcock admitted that this has been a drag on returns relative to the benchmark over the past year, having underperformed the FTSE AW Asia Pacific ex-Japan index by 6.49 percentage points with a total return of 9.77 per cent.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
However, the manager remains sceptical that these areas of the market will continue to perform strongly over the medium term.
“The fund does hold some cyclical companies – for example in the technology sector – but favours those that I believe have less volatile earnings potential,” he said.
“Despite local government bond yields rising slightly in tandem with the US, equity yields in the region still look very attractive by comparison.”
Aside from keeping a close eye on the macroeconomic backdrop, Pidcock regularly engages with company management teams in a bid to understand the micro environment of each firm.
When deciding whether to invest in a company, the manager looks for teams that are familiar with their positioning within their respective market places and can adjust to potential future headwinds.
“I continue to have a lot of engagement with the companies that I invest in,” he continued. “I have a particularly positive outlook on the more developed Asian markets, where recent meetings with chief executives and chief financial officers of the companies in which the fund invests have reassured me that earnings growth should continue through 2017.”
Pidcock said that is mostly because these companies reside in countries with political stability, good governance and growing economies.
Jupiter Asian Income’s largest regional weighting is to Australia at 25.9 per cent, followed by Hong Kong at 18.4 per cent and Taiwan at 15.3 per cent. In terms of individual stocks, its largest holding is Taiwanese Electronics manufacturer Hon Hai Precision, which accounts for 6.2 per cent of the portfolio. It also has significant weightings in Taiwan Semiconductor, Samsung Electronics and pan-Asian life insurance firm AIA Group.
“There continues to be strong growth and structural improvements, and the dividend-paying culture remains entrenched, so I remain upbeat about the range of opportunities in developed Asian markets,” Pidcock added.
Broadly speaking, the manager said the first half of the third financial quarter was difficult for Asian stock markets, given the heightened political tension between the US and North Korea.
This changed in the second half though, with the FTSE AW Asia Pacific ex Japan index finishing the quarter up 1.85 per cent in sterling terms.
Performance of index in Q3 2017
Source: FE Analytics
“In the benchmark, the strongest performance in the region in sterling terms came from Hong Kong and Thailand, with the latter benefiting from exports and tourist-related inflows,” Pidcock explained.
“The weakest performance in the benchmark came from Pakistan (to which the fund has no exposure), following the removal of prime minister Nawaz Sharif by Pakistan’s supreme court in July, and [Donald] Trump’s criticism of the country’s failure to tackle terrorism later in the quarter.
“Performance in Indonesia and New Zealand was also weak.”
Jupiter Asian Income underperformed its benchmark with a loss of 0.2 per cent over the last quarter, which the manager said was partially due to the oil price recovery in September and its underweight to the sector.
He said the portfolio was also bruised by strong manufacturing data from China and the subsequent rise in commodity prices – an area of the market to which the fund has no exposure to at all.
“The fund’s overweight position in New Zealand also detracted from performance during the quarter,” Pidcock continued.
“New Zealand’s general election in September saw the ruling party fail to achieve enough votes to maintain power on its own. It is likely to be several weeks before the coalition negotiations will see a new government formed, and this uncertainty negatively impacted the New Zealand stock market.”
He added: “The fund benefited from several core positions in Hong Kong during the quarter.”
While the likes of Chinese hygiene company Hengan International and Tencent provided particularly positive contributions to the fund, largest holding Hon Tai was one of the largest detractors. This was due to reports that the iPhone 8 showed less demand than as expected and that suppliers were therefore told to slow delivery.
“AIA Group bought the life insurance business of Commonwealth Bank of Australia for $3bn during the quarter, making it the biggest insurer in New Zealand and Australia,” Pidcock said. “Despite quite a low current yield, we hold the company in the fund as we are optimistic about the potential for dividend growth.”
Elsewhere, the manager reduced his position in Taiwan Mobile because of its limited growth potential.
“As we did not want to reduce the fund’s overall weighting in Taiwan, we used proceeds from the sale to top up core holdings in Delta Electronics, TSMC and Hon Hai,” he added.
Since the fund’s launch in March 2016, Jupiter Asian Income has returned 40.96 per cent relative to its average peer and benchmark’s respective returns of 52.73 and 54.77 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Had an investor placed an initial £10,000 into the fund at launch, they would have received £635.82 in income alone.
The fund has a clean ongoing charges figure (OCF) of 0.98 per cent and yields 3.8 per cent.