Baillie Gifford Developed Asia Pacific, Fidelity Asia and Old Mutual Pacific are the funds IBOSS’s Chris Metcalfe is backing in the Asian equity space, one market where the firm has a “less bearish” outlook.
Metcalfe, manager of the firm’s model portfolio products, said he is bearish and is holding a record level of cash in the portfolios as well as adding a gold position – a topic FE Trustnet will consider in more detail later this week.
However, one area that he is less bearish about is Asia and the emerging markets, which he has held an overweight position since the end of 2015.
“At the time when we were first overweight the emerging markets and underweight the US, it was based on valuations and also on the medium-term outlook for the demographics and growth potential,” Metcalfe said.
“I think it is hard to argue that there isn’t a lot of emerging market countries that don’t have a better profile than the developed market ones.
“And they were just coming off pretty low valuation points which for a couple of months got even lower.”
Indeed, as the below chart shows, emerging markets fell sharply at the start of 2016 as fears of a slowdown in China hit markets but have since rallied, rising by 58.71 per cent over the last two years in total.
Performance of index over 2yrs
Source: FE Analytics
“We have done very well being overweight emerging markets and Asia and that has given us a lot of our outperformance for 2017,” Metcalfe noted.
The manager noted that nothing has really changed since 2015 in terms of the relative appeal of the emerging markets to the US and, despite the outperformance, the market remains cheap in comparison with domestic markets.
“One of the reasons for the premium you used to pay for emerging markets relative to developed was political instability and we would say that a large amount of Asia and the emerging markets are considerably more stable than the US,” he said.
“Politically, the US is more unstable than it has been in my lifetime and I think I would also say the same about the UK. For us the situation has gone more in favour emerging markets and Asia than when we went originally overweight a couple of years ago.”
While the manager prefers to find a do-it-all fund, he said this is incredibly difficult to find and therefore tends to spread his fund selection across multiple managers to reduce volatility.
In Asia, Metcalfe currently holds three funds, including the five FE Crown-rated Bailie Gifford Developed Asia Pacific. It is an interesting proposition, he said, because it includes exposure to the Japanese market.
“We basically outsourced the decision-making process because Japan has been a conundrum. I have been in the industry for 33 years and I wouldn’t say I know a lot more about Japan than I did 33 years ago with regards to how the market moves.
“We have seen plenty of managers come and go over the years who have left shaking their heads. It is very difficult investing in Japan.
“It seems to just paddle its own canoe and today I think the government owns nearly 70 per cent of the ETF market.
“It is just a different animal but it does offer an element of diversification, it is one of those markets that can be trading in a different direction to global equities so from that point of view we like it.”
The £138m fund run by Iain Campbell since 2014 with Tolibjon Tursunov joining him in June this year has been a consistent performer over the last three and five years, beating both the IA Asia Pacific including Japan sector and MSCI Pacific benchmark over both periods.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Currently the fund has a 64.5 per cent weighting to Japanese equities, with 15.5 per cent in Australia, 11.6 per cent in Hong Kong and 7.2 per cent in Singapore.
It has a yield of 1.23 per cent and a clean ongoing charges figure (OCF) of 0.59 per cent.
“The other two funds – the Fidelity Asia and Old Mutual Asia Pacific – have got fantastic track records and very strong teams,” Metcalfe said.
“They are managed in very different ways. The Old Mutual one [managed] by Ian Heslop along with the other funds he [oversees] are run in a very specific way: they are not meeting managers and they are not stockpicking.”
The five crown-rated fund has been a top quartile performer over one, three, five and 10-year timeframes and has returned 138.47 per cent over the last decade, beating both the IA Asia Pacific ex Japan sector and the MSCI AC Asia Pacific ex Japan benchmark.
The £311m fund has been run by the trio of Amadeo Alentorn, Ian Heslop and Mike Servent since 2011 during which time it has been the best performer in the sector.
Performance of fund vs sector and benchmark since managers start
Source: FE Analytics
Like the other funds the team run, the fund is managed using a quantitative process that looks for stocks with above-average growth and below-average valuations and is currently made up of 216 stocks.
The fund has a yield of 1.12 per cent and an OCF of 1 per cent.
Conversely, FE Alpha Manager Teera Chanpongsang, who runs the £2.6bn, five crown-rated Fidelity Asia fund uses a bottom-up stockpicking approach.
“One of the things I like about Fidelity is they have feet on the ground and in areas like Asia and the emerging markets more generally is somewhere where those extra resource, boots on the ground, can add value,” Metcalfe said.
The fund is therefore a more concentrated portfolio, with 92 positions overall. It is 33.8 per cent weighted to technology with 26.4 per cent in financials and 12.9 per cent in consumer discretion companies.
He has been in charge of the fund since 2014 during which time it has returned 87.26 per cent, 25 percentage points ahead of the IA Asia Pacific ex Japan sector and 16.81 percentage points ahead of the MSCI AC Asia ex Japan benchmark. Fidelity Asia has an OCF of 0.97 per cent.
“They go in very different ways and have very little in common with their holdings. That little trio of Asian funds gives us a small amount of Japanese holdings and have very little commonality in their investment style but all have successful long-term track records and that is basically something that we are relentlessly looking for,” the manager said.