Asia sector investment review

Asia is a hugely important region to investors. We take a look at how funds focused on this varied area on our Preferred List have fared of late.

| 11 min read

Investing in Asia offers a broad range of opportunities from developed nations such as Australia to emerging markets such as China and India. As much as 60% of the world’s population lives in Asia, so it is a hugely important region and far too big to ignore, albeit population growth and economic expansion doesn’t necessarily equate to stock market returns.

Many passive, or tracker, funds, such as those on our Preferred List, L&G Pacific Index Trust and Vanguard FTSE Developed Asia Pacific ex Japan UCITS ETF, invest in developed Asia (outside of Japan) which means they are mostly exposed to Australia, South Korea and Hong Kong. The L&G fund also includes Taiwan. They therefore typically have different portfolios to most active funds in the sector, which often encompass India and mainland China too, and occasionally other emerging Asian countries such as Indonesia and Thailand.

For broad passive exposure exclusively to emerging Asia it can be preferable to select an emerging market product rather than an Asian one. These will have chunky weights to China and India. Or an investor could consider single country strategies instead.

As an alternative, active funds contain a mix of developed and developing Asian economies. However, there is a lot of variation, usually according to the fund management approach, so investors need to ensure they are happy with the philosophy of the manager and the mix of geographical exposures in the fund before investing. For instance, Stewart Investors Asia Pacific Sustainability Fund contains around 45% exposure to India presently, whereas in Invesco Asian it is under 10%. Given the differences in geographical make-up it is normal to see wide variations in performance.

Asia and emerging markets are areas where we think it is worth considering active funds. The less mature nature of many of the markets and the relative lack of in-depth analysis being conducted on companies by the financial community tends to result in less efficiency and more anomalies for active managers to capitalise on. In developing countries there is also typically less stringent governance, so an active manager may also add value by avoiding the problem companies or, in certain cases, those they think could be broadsided by the political or regulatory landscape.

Recent performance

Last year (2022) was a difficult year for many Asian and emerging markets with a combination of slowing growth, rising interest rates and a strong US dollar posing challenges. China finally began dialling back its strict zero COVID-19 approach, but economic recovery has since stalled with authorities now promising measures to boost consumer spending, improve access to funding for businesses and support the property industry. Meanwhile, India has been the standout performer over both 2022 and 2023 so far with Taiwan’s technology companies also helping drive stronger returns, fuelled by an anticipated surge in demand for artificial intelligence services.

Overall, here's how the actively-managed funds in the Asian sector on our Preferred List got on over the past 12 months, as well as in previous periods, with commentary on each fund detailed below.

Past performance is not a reliable indicator of future returns. Figures are calculated in £ on a % total return, bid to bid price basis with net income reinvested; Source: FE Analytics, data to 31/07/23

Four Asia sector investments to consider

1. Asian Total Return Investment Trust

Schroder Asian Total Return is an investment trust that aims to provide capital growth by investing in Asia-Pacific equities and managing risk through hedging techniques. Schroders has a large Asian equity team which is important given the bottom up, research-intensive nature of the process they use for identifying companies.

Managers Robin Parbook and King Fuei Lee believe investors have to be selective in how they take exposure to the Asian growth story in order to maximise returns. The key positions in the portfolio are businesses with strong secular growth trends, away from the state-owned enterprises in the benchmark. They have become increasingly negative on China, particularly since the government interventions of recent years, and despite having previously invested in the large internet names this is reflected in a consistent Chinese underweight in more recent years. Presently exposure is only about 5%, offset to a degree by larger Taiwanese exposure and to a lesser extent Hong Kong. We would therefore expect the trust to struggle on a relative basis during any periods where Chinese shares do particularly well.

The managers are increasingly worried a bubble is building up in artificial intelligence and some electric vehicle related stocks which leaves them cautious on these areas. However, they are still positive on chip giant Taiwan Semiconductor. One unusual position held is European luxury goods LVMH, a play on the wealthy Asian consumer and a strong performer the managers have consistently trimmed but are happy to continue holding.

2. Fidelity Asian Values Investment Trust

This more specialist Trust can complement larger company-focused Asian funds and blends well with growth-biased investments from a style perspective. Contrarian manager Nitin Bajaj seeks out good quality, conservatively run but undervalued opportunities in small and medium-sized businesses across Asia. He continues to stay away from fashionable stocks where high valuations do not leave enough ‘margin of safety’, as well as those with high debt levels. Given the breadth of opportunities available to the manager and the inefficient nature of the asset class we believe that the manager is well placed to add value.

Bajaj is focused on value and protecting the longer term downside rather than obsessing about relative performance. The ability to short (to profit from falling process) and the modest use of derivatives are differentiating features the manager can also use to help protect capital when he sees fit. As performance has the potential for be volatile given the nature of the asset class as well as the manager’s defined style, investors should be willing to hold the Trust for the long term.

Performance so far in 2023 has been very strong, although share price returns have been flattered by a modest closing of the trust’s discount to NAV. Past performance is not an indication of future returns. Unlike some Asian equities investors Bajaj finds plenty of interesting companies in China, including those who are still experiencing operating momentum from the country’s exit from lockdown. The trust has upped its allocation there to around 30% versus the benchmark weight of around 10%.

3. Invesco Asian

Manager Will Lam has consistently shown a bias towards cash-generative companies with strong balance sheets, focusing on valuations and seeking to take advantage of pricing inefficiencies in Asian markets, largely due to other investors’ behavioural biases.

Lam’s process involves extensive company contact and emphasises the importance of positive cash flow, sound balance sheets, stability of market position and the quality and openness of management. The process is pragmatic and flexible, aiming to respond appropriately to a range of different economic and market conditions. His strategy of investing in companies that are trading below their estimate of fair value means looking at unloved areas of the market. As such, unlike many active managers, he has not shied away from China, and this has very recently worked against the fund as initial promise of a sharp economic recovery from Covid lockdowns fizzled out. Nonetheless, the fund’s relative performance continues to be solid, cementing its longer term record – although past performance is not an indication of future returns.

The fund continues to have significant exposure to dominant semiconductor companies in Taiwan and Korea. There is currently some excitement around these stocks and the growth of Artificial Intelligence services, but even so the manager believes the level of semiconductor demand required to support AI has not been fully priced into the large Asian tech stocks. The notable geographical change over the past year has been an increasing exposure to South Korea where the manager sees particular opportunity with the market cheap relative to others and improvements in corporate governance and dividend pay-outs underappreciated in his view.

4. Stewart Investors Asia Pacific Sustainability

Stewart Investors Asia Pacific Sustainability seeks the best Asian investment opportunities by taking a long-term perspective to identify sustainable business models and predictable growth. The team are very conscious of management quality when investing and avoid any companies that exhibit poor corporate behaviour.

The principle of sustainability means meeting the needs of the present without compromising the needs of future generations. The logic of investing with this in mind is that companies that treat their employees, suppliers and customers fairly, as well as having respect for the environment and local communities, have greater chance of long term success and are less likely to fall foul of scandal or controversy – and ultimately punishment from regulators or rejection by consumers.

The managers aim to classify potential investment opportunities into one of three sustainability ‘sectors’: sustainable goods and services, responsible finance and required infrastructure. There is also significant emphasis on the quality of a business incorporating factors such as management standard, resilience of the financial position and the durability of a company’s business model and market position.

Geographically, the managers heavily lean towards Indian companies and are relatively light in Chinese exposure, a product of where they find companies with suitably robust governance. This is a key characteristic of the fund and can be very influential to relative performance as sentiment towards India and China ebbs and flows over time. Historically, it has often been a tailwind, including over the past year, but going forward this cannot be expected to always be the case.

The fund continues to have significant exposure to consumer staples, technology and healthcare, with strong structural geographic tilts to Taiwan and India at the expense of Hong Kong and China. A top contributor since the beginning of 2023 was Indian conglomerate Mahindra & Mahindra. The managers explain the company is improving capital allocation decisions and is on a path to turnaround lagging parts of the business by investing to build a more robust franchise. The fund also continues to take advantage of its ability to allocate to ‘off benchmark’ positions and a position in Japan sits at 8.5% presently.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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