Asia sector investment review

Asia presents a wide array of investment opportunities, spanning developed economies like Australia to emerging markets such as China and India. With around 60% of the global population residing in the region, its economic significance is undeniable. However, it's important to note that population growth and economic expansion do not always translate into strong stock market performance.

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). This 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. Active strategies often encompass India and mainland China too, as well as other emerging Asian countries such as Indonesia and Thailand.

For broad passive exposure 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. Investors therefore 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 All Cap Fund contains around 35% 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 by the financial community tends to result in less efficiency. That can mean a company’s prospects might be less understood and the shares are mis-priced, offering the chance for active managers to find undervalued stocks. Developing countries typically have less stringent governance. This gives an active manager the opportunity to also add value by avoiding problem companies or, in certain cases, those they think could be undermined by the political or regulatory landscape.

Recent performance

Following several years where India has been the standout performer, the past year has favoured China as investment sentiment warmed to planned moves by the government to boost the economy. The nation was, however, in the eye of the recent tariff storm. It retaliated to President Trump’s Liberation Day announcements on 2^nd of April and was subsequently hit with a tariff of 145% - an effective trade embargo.

With Trump’s stance softened, there is now the temporary position of 30% reciprocal tariffs between the US and China and baseline 10% US tariffs on other Asian nations. This de-escalation allows countries time to negotiate deals, but uncertainty remains concerning the long-term impact across the region. Owing to their lower cost of production many Asian nations are major exporters and global manufacturing hubs, so a higher cost of trade combined with a global slowdown could hit their growth.

Despite this the domestic picture in many nations is more positive, and some companies may be able to adapt their supply chains or have sufficient pricing power to pass on additional costs to consumers.

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 below. As always, investors should align their selections with their risk tolerance, market outlook, and confidence in fund managers’ approaches.

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 31/05/25

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 manage 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 must be selective in their exposure to the Asian growth story 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 that offer little opportunity for growth.

The managers were previously negative on China and maintained minimal exposure, but increased their allocation over the year, which has been beneficial to performance. For instance, April’s volatility provided an opportunity to top up a holding in Tencent that is now the second largest position at around 7%.

Meanwhile, top holding Taiwan Semiconductor has been volatile and largely correlated with other global tech stocks, but the large weight has been positive for the Trust over the period. The duo are wary of valuations across the region which they say aren’t cheap versus history, and they are more cautious on India in particular compared with many peers in the sector.

2. Fidelity Asian Values Investment Trust

This more specialist Trust can complement larger company-focused Asian funds and blend 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 he is well placed to add value over the long term.

The ability to short (to profit from falling prices) 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 to 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.

Heavy exposure to China has primarily been among lesser-known names while most of the recovery in the region has been in the larger, tech-related stocks. However, many of the portfolio positions are starting to turn around and there have been some notable successes including Full Truck Alliance, an ‘Uber’ for trucking, according to the manager. He believes the valuation gap between India and China remains extreme and acknowledges the risks across the region from the second and third order effects of tariffs whereby a contraction in exports results in a wider economic slowdown.

A further development is the building of a large position in Indonesia, which is now around 15% of the portfolio. Bajaj is impressed with the combination of quality and attractive valuations in a nation he says has favourable demographics and conservatively run finances.

3. Invesco Asian

Manager Will Lam has consistently shown a bias towards cash-generative companies with strong balance sheets, albeit with a slight preference for technology and internet related stocks. He focuses on valuations and seeks to take advantage of pricing inefficiencies in Asian markets that result from 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 to a range of different economic and market conditions.

His strategy of investing in company shares trading below their estimate of fair value means looking at unloved areas of the market. As such he has not shied away from China, and this has recently worked well for the fund. However, it is important to note past performance is not a reliable guide to future returns.

Lam again highlighted to us his cautious approach to investing in India, outside of financials, preferring to wait for more favourable valuations. Instead, the manager has been adding back into Taiwan Semiconductor following its period of weakness and is now back up to ‘market weight’ i.e. in line the benchmark index, or 8.5% of the fund. Chinese internet stocks Alibaba, Tencent, NetEase remain cheap in his view, noting their cash generation and strong balance sheets.

4. Stewart Investors Asia Pacific All Cap

This well-established fund seeks superior Asian investment opportunities by taking a long-term perspective to identify sustainable business models with more predictable growth. The team are very conscious ofmanagement quality when investing and avoid any companies that exhibit poor corporate behaviour.

There is also significant emphasis on the quality of a business incorporating factors such as management standard, resilience of finances and durability of a company’s business model and market position.

Geographically, the managers tend to heavily lean towards Indian companies and are relatively light in Chinese exposure, a product of where they find more companies with suitably robust governance. This is a key characteristic of the fund and can be very influential to relative performance – as has been the case over the past year which has seen the fund has lagged the market and peers in a period where Chinese shares enjoyed a rally.

In addition, the sort of dependable, high-quality companies the fund owns have been under some pressure. The managers are adamant that while valuations have receded, there is no corresponding downturn in quality or earnings potential. The portfolio is concentrated at present, most notably in Mahindra & Mahindra (Indian autos), HDFC and OCBC (banks).