Asia sector investment review

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. Although 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). 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, and occasionally 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 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. That can mean a company’s prospects might be less well understood and 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 the problem companies or, in certain cases, those they think could be broadsided by the political or regulatory landscape.

Recent performance

India has been the standout performer in recent years and some fund managers we have spoken to have expressed concerns about relatively high valuations in the market. However, others feel valuations are justified based on the quality of the businesses there as well as the growth trajectories they are likely to command.

Taiwan’s technology companies have also helped drive stronger returns, fuelled by an anticipated surge in demand for artificial intelligence services. Taiwan Semiconductor (TSMC), the giant Taiwanese semiconductor businesss, recently crossed $1 trillion market cap for the first time. It is typically a large position in funds investing in the region. By contrast, China has again underperformed the rest of the region. A wariness of Chinese equities amid government intervention has been amplified by concerns surrounding the outlook for economic growth.

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 31/07/24

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.

They have become increasingly negative on China, particularly since the government interventions of recent years. Despite having previously invested in the large internet names this is reflected in a consistent Chinese underweight in recent years. Presently exposure is only about 7%, 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 have grown increasingly worried a bubble is building up in artificial intelligence and some electric vehicle related stocks which leaves them cautious on these areas. Something perhaps vindicated by recent market volatility. However, they are still positive on chip giant TSMC, a 12% holding that has helped power a slight outperformance versus the benchmark index over the past year. The managers have become a little more cautious on India too. They continue to run a small amount of hedging with the aim of tempering volatility.

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.

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 he 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.

The contrarian nature of the manager has resulted in the Trust largely missing the strong momentum in Taiwan, India and AI-related stocks over the past year. A holding in TSMC partly helped make up for that and there are some less well-known areas of the tech supply chain also represented such as distributors. Bajaj has been finding a lot of opportunities in China, but despite attractive valuations the market continues to underperform and drag down relative performance versus the index.

3. Invesco Asian

Manager Will Lam has consistently shown a bias towards cash-generative companies with strong balance sheets. 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, unlike many active managers, he has not shied away from China, and this has recently worked against the fund. Nonetheless, relative performance continues to be solid, cementing its longer-term record. Although past performance is not a reliable guide to future returns.

The fund continues to hold significant exposure to dominant semiconductor companies in Taiwan and Korea, which have helped power returns. However, having less invested in India was painful to relative performance and explains why the fund has lagged the benchmark index over the past year. The manager has increasingly enthusiastic about Chinese internet stocks, evidence of his contrarian tendencies, observing their cash generation and strong balance sheets.

4. Stewart Investors Asia Pacific Sustainability

Stewart Investors Asia Pacific Sustainability 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 of management 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 companies with suitably robust governance. This is a key characteristic of the fund and can be very influential to relative performance.

The fund beat its benchmark by a little over the past year and remains a strong longer-term performer, although past performance is not a guide to future returns. Investing more in India over the period was positive with the fund’s largest investment, Mahindra & Mahindra, the Indian conglomerate adding to returns. The managers explain the company is improving capital allocation decisions and is on a turnaround path. CG Power, the leading manufacturer of motors in India, and long-term holding Tube Investments were also positive for the fund.

Taiwanese semiconductor giant TSMC was also one of the top performers but having less invested here than the benchmark detracted. Meanwhile, Hong Kong listed, plant-based beverage provider Vitasoy has had a tough time having been a previous strong performer since purchase in 2010. The managers conclude there has not been a significant deterioration in the quality of the company and current gloom is unjustified.