Report: IMA Asia Pacific excluding Japan

This sector encompasses funds that invest at least 80% of their assets in Asia Pacific equities, but do not invest at all in Japanese securities. This broad definition leads to a very diverse range of emerging economies, with China and India leading the way. Other developing economies included in this sector are Thailand, Korea, Taiwan, Singapore, Malaysia, Australia and New Zealand.

As a whole, the sector returned 97.11% over the 3 years to April 2008, substantially outperforming the FTSE 100 index at 38.39%. Its 78 constituent funds represent a major increase on the 62 members of just three years ago, reflecting a resurgence of interest in this region as conditions have improved.

Those 62 funds have displayed a wide range of returns over the past three years, but even the worst performer generated a satisfying 58.54% over this period (the FTSE 100 returned just 38.39%). Investors fortunate enough to have picked the leading retail fund would have seen an impressive return of 151.64% from a portfolio principally invested in China.

With a specific China focus, though, our top fund is not representative of the sector as a whole, and this is borne out by its respectively weaker r-squared correlation of 0.83. Nevertheless this sector has become a lot more correlated with the sector average as this figure was 0.64 a mere 6 months ago.

The second-ranker also maintains a China focus, and only the third fund provides a more diversified portfolio, and offers a much stronger correlation to the sector at 0.97. Far from suffering by holding back from a full-scale punt on China's stellar growth rates, the fund strongly challenges the leaders and investors will not have been disappointed at its 132.95% return.

However given the strong returns seen in this sector, volatility is still an important consideration due to the nature of immature frontier economies, where large losses seen in short periods of time are not an uncommon occurrence.

Nevertheless, since the region's financial crisis of 1997, banks have matured rebuilding their balance sheets.

This increased stability in company balance sheets and profitability has led to growing confidence and the development of domestic consumer marketplaces with mass increases in Foreign Direct Investment (FDI).

This economic stability has been further exemplified with the region still being able to produce relatively civilized risk adjusted returns as the US and other developed economies have slowed significantly, showing signs of de-coupling and independence, with the sector average volatility of 18.51%, which given the gains experienced, does not appear excessive.

With such a diverse sector, research and vigilance must play a pivotal role for investors wanting to take advantage of funds that may be riding the high wave of returns.

Valuation figures are still relatively high in the region as a whole and so as a means to investing do not reflect the best criteria on which to base a decision.

Inflation across the region also remains high, with China recording the highest inflation of 8.7%. Only Korea and Taiwan possess low inflation rates. Fund selection is therefore left down to how one feels the growth of these markets will persist, and according to Financial Express Analytics only 9 funds display a better risk-return outcome than the IMA Sector average over the last 3 years.

Of these 9 funds, First State Asia Pacific excluding Japan offers the best combination of risk and reward over the period, of 102.3% return given a 15.6% risk, and furthermore possesses a 3 crowns rating, which takes into consideration a funds alpha, volatility and consistency.

However these funds are still vulnerable to macro-economic events and are subject to political risks such as corruption and expropriation, highlighting some of the key hazards of investing in these underdeveloped regulation-lite economies.

Nevertheless with the 2008 Olympics on the way, China should continue to boost this regions consumer confidence for the near future, as the roller-coaster ride continues.



*Source of all data: Financial Express Analytics