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Fund Review: Asia-Pacific ex Japan

Introduction

It is little wonder therefore that net retail sales of the Investment Association’s Asia-Pacific ex Japan sector were positive in just three of the 12 months to December 2015. Even the healthy inflows of £146m last April were not enough to offset the wider trend, leaving the sector with overall outflows of £587m in 2015.

The situation has not improved much since, with the MSCI AC Asia-Pacific ex Japan index down 3.3 per cent for the year to date to February 24, while the MSCI AC World index has fared only slightly better with a fall of 2.1 per cent, data from FE Analytics shows.

China remains the problem child of Asia, though it is still an economy delivering better growth than many western nations, and there are signs that the transition of its economy is providing new opportunities.

Commenting on a recent trip to second- and third-tier cities in China, Franklin Templeton’s Mark Mobius says the expedition “gave us the impression that the service sector [including tourist and culture-related industries] is strong and likely to continue growing”.

He adds: “We noticed that infrastructure and property investment had slowed due to a more stringent approval process and still-high property inventory, but we believe this could improve gradually in 2016 as financing to local governments has improved. While we recognise many investors are concerned about China’s growth rate, one of [its] biggest potential challenges may be instilling investor confidence.”

THE PICKS

Veritas Asian

Launched in 2004, this £260m fund is managed by Ezra Sun, with the aim of building capital over a number of years through a portfolio of equity and related securities in companies located in Asia, excluding Japan. The fund has significantly outperformed both the Investment Association Asia-Pacific ex Japan sector average and the MSCI AC Asia-Pacific ex Japan index across one, three and five years. Meanwhile, its 10-year return to February 24 of 181.4 per cent is more than double the index’s gain of 90.9 per cent, while the sector’s average of 95.4 per cent also lagged the vehicle.

BlackRock GF Asian Dragon

This $1.4bn (£1bn) fund is managed by Andrew Swan and aims to deliver capital growth and income by investing at least 70 per cent of its total assets in the shares of companies based in Asia, excluding Japan. Its top-10 holdings include big names such as Tencent and Samsung. The fund’s performance has been consistently strong, with a three-year return of 9.3 per cent compared with the IA sector’s average loss of 5.1 per cent and the MSCI AC Asia ex Japan index’s fall of 2.8 per cent.

EDITOR’S PICK

Pacific Assets Trust

Managed by Stewart Investors, this investment trust was launched in 1984 and currently has total net assets of £234m. The vehicle won the Asia-Pacific category at the IA 100 Club awards in 2015, while its aim is to achieve long-term capital growth in selected companies in the region and the Indian subcontinent, excluding Japan, Australia and New Zealand. It has outperformed both the Association of Investment Companies’ Asia-Pacific ex Japan sector average and the MSCI AC Asia ex Japan index across one, three, five and 10 years, with a five-year return of 68.9 per cent against the sector’s average of 18.1 per cent.

Mr Mobius notes that consumption remains a strong investment theme in the country: “Investors should consider looking beyond China’s short-term market gyrations to its long-term potential.”

But aside from China there are some bright spots in Asia, particularly in India. Sunil Asnani, manager of the Matthews Asia India fund, points out that India’s latest GDP figure of 7.3 per cent year on year indicates growth that is outpacing China.

Mr Asnani notes India has its own challenges, including excessive regulation, lack of progress in structural reform and corporate governance issues unique to the country. “Macro fundamentals have not been supportive as India has struggled with high inflation and twin deficits, leading to a steady depreciation of its currency. These hurdles have precipitated continued volatility in the equity market,” he adds.

“Despite its issues, India has a healthy corporate sector with many well-run, entrepreneurial firms. Although more needs to be done on the reform front in order to sustain its growth path, India remains a secular and buoyant growth story.”

Further afield among the more emerging economies of Asia, Emily Fletcher, co-manager of the BlackRock Frontiers Investment Trust, notes that Asian countries will not be fully immune to events in both China and the developed world in the current economic cycle.

But she adds: “We see the greatest opportunities in Bangladesh and Pakistan. Bangladesh has seen GDP growth of more than 6 per cent for the past three years and the IMF expects growth levels to accelerate from here with inflation remaining at moderate levels.”

In this special report