Old Mutual Asia Pacific, Fidelity Asia, Baillie Gifford Developed Asia Pacific and Janus Henderson Emerging Market Opportunities are IBOSS Asset Management’s top Asia fund picks across its model portfolio range, according to senior investment analyst Chris Rush.
Rush said the firm have built an overweight position in Asia, relative to history, based on more favourable demographics and valuations in the region.
Performance of MSCI Asia vs MSCI World in 2017
Source: FE Analytics
However, the analyst noted that investors have also underestimated the narrowing of political disruption between developed and developing countries.
He explained: “Traditionally investors would expect to receive a risk premium for the political risk picked up by investing in Asian equities.
“However, not only has corporate governance markedly improved but the increasing political turmoil in developed markets has narrowed the – once substantial – gap.”
Rush said it has no plans to change its overweight stance towards Asia in the coming twelve months but has worked hard to ensure it is not “overly exposed” to the outperforming Asian technology sector.
On Japan, Rush said, the firm have opted to take a neutral stance opting for exposure to Japanese equities via its pan-Asian strategies.
“Japanese equities look to us to be the equivalent of the Worlds’ End Pub,” he said. “Hawkish sentiments and outright rate rises from other central banks indicate to investors that the easy money has largely been made.
“Japan is however the exception, and as the only pub still open investors are keen to get a last drink in.”
Yet, a small reduction in long-dated bond purchases by the Bank of Japan at the start of the year as well as the prospect of “stealth tapering”, could see an increase in investor sensitivity over the next 12 months.
Below, Rush explores in more detail the four Asia funds they are currently using in the firm’s model portfolio range.
Baillie Gifford Developed Asia Pacific
The first fund highlighted by Rush is the five FE Crown-rated Baillie Gifford Developed Asia Pacific managed by Iain Campbell and Tolibjon Tursunov.
The £147.1m fund invests in Japan, Australia, New Zealand, Hong Kong and Singapore and some Hong Kong-listed Chinese stocks, but does not have any holdings in emerging market countries from the region, unlike other funds in the IA Asia Pacific Including Japan sector.
The strategy takes a long- term perspective of five years and has a preference for growth stocks, while the managers’ process is driven by “rigorous, fundamental, bottom-up analysis”.
Over five years, the fund has delivered a total return of 86.78 per cent, compared with a 64.60 per cent gain for the MSCI Pacific index.
Performance of fund vs index over 5yrs
Source: FE Analytics
“It is important to point out that fund availability within the sector is somewhat limited at only eight funds,” noted Rush. “That said, we feel that there are measurable benefits to outsourcing the Japanese allocation of the portfolio to a fund with a wider remit and a management team with a specific focus on the geography.”
Lead manager Campbell joined the fund in 2014, while Tursunov was appointed as a manager of the strategy last year.
“Iain Campbell and the wider team fit the bill and have outperformed Asia Including Japan, Excluding Japan and Japan specifically over his tenure,” said Rush.
“Not only that but the fund remains of a reasonable size of £147.4m and is substantially cheaper than the average Asia/Japanese fund.”
The fund is heavily weighted to Japanese equities, representing 65.80 per cent of the fund. Its top ten holdings include Baillie Gifford’s Japanese Smaller Companies fund, United Overseas Bank, Galaxy Entertainment Group, Sisheido and MS&AD Insurance.
Baillie Gifford Developed Asia has an ongoing charges figure (OCF) of 0.59 per cent.
Old Mutual Asia Pacific
The second fund highlighted by Rush is the five crown-rated Old Mutual Asia Pacific, overseen by Amadeo Alentorn, Ian Heslop and Mike Servent.
“We have held and had faith with the Old Mutual Asia Pacific management team for quite some time now and that faith has, so far, paid dividends,” the analyst said.
“Ian Heslop and the wider team use the same approach to investing across a number of strategies and geographies, though it seems to us to be particularly effective in Asia.
“It is our opinion that the team’s emphasis on risk and hands‐off approach to singular stocks gives the overall portfolio a different shape to many of their peers.”
Performance of fund vs sector & benchmark under Alentorn, Heslop and Servent
Source: FE Analytics
The fund has been a top quartile performer over one, three and five years, delivering a total return of 170.71 per cent compared with a gain of 88.83 per cent for the average IA Asia Pacific Excluding Japan sector fund and a 90.28 per cent for the benchmark MSCI AC Asia Pacific ex Japan index since the team took over, as the above chart shows.
Old Mutual Asia Pacific has an OCF of 1 per cent.
Fidelity Asia
FE Alpha Manager Teera Chanpongsang’s five FE crown-rated Fidelity Asia also makes the list, with Rush noting the manager’s outperformance in every single calendar year since taking over the fund in 2014.
“This performance has understandably generated a lot of interest and the fund has grown by 67 per cent since 2016 inclusive of performance,” he said.
“We are however aware that the fund is heavily invested in the technology stocks with heavy weightings towards Tencent, Alibaba, Samsung and Taiwan Semiconductors.”
Indeed, the £2.8bn fund’s largest sector weighting is to information technology which represents 32 per cent of the portfolio. Other significant sector weightings include financials (27.50 per cent) and consumer discretionary (13.40 per cent).
Since Chanpongsang took over, Fidelity Asia has returned 116.70 per cent compared to its average peers and MSCI AC Asia ex Japan benchmark’s respective returns of 85.24 per cent and 95.01 per cent.
The £2.81bn fund has an OCF of 0.97 per cent.
Janus Henderson Emerging Markets Opportunities
Rush’s last pick is not strictly an Asian fund but helps to add to the model portfolio range’s Asia exposure for the £515.7m Janus Henderson Emerging Market Opportunities fund.
Run by Glen Finegan, an FE Alpha Manager and Janus Henderson’s head of global emerging market equities, since February 2015, the fund targets long-term capital growth.
Under Finegan, who was joined by Stephen Deane in 2016, the fund has delivered a total return of 35.66 per cent, underperforming the MSCI Emerging Markets index gain of 41.63 per cent and the IA Global Emerging Markets sector 37.46 per cent.
Performance of fund vs sector & index under Finnigan
Source: FE Analytics
“Finegan is a highly experienced manager. His focus on selecting defensive stocks in what is considered a higher risk equity market brings a further facet of diversification to the portfolio,” said Rush.
“More specifically the fund has been materially underweight technology stocks at only 7.7 per cent of the overall portfolio.
He added: “Admittedly performance has struggled recently, however, the managers long term track record speaks for itself.
“We continue to hold the fund at our maximum weighting of 4 per cent to retain both the defensive and diversification credentials of the fund.”
The fund has a 26.29 per cent exposure to Pacific Basin stocks, and a further 13.72 per cent invested in Asia Pacific equities.
Janus Henderson Global Emerging Market has an OCF of 0.91 per cent.