But with emerging markets being weighed down by concerns over US tapering, slower Chinese growth and current account deficits in the likes of Indonesia, is there still value in the region?
The key is looking beyond the obvious emerging market names that have hogged the headlines for so long. For example, in 2013, the MSCI Philippines index dropped 4.51 per cent, while the MSCI Indonesia index recorded a double-digit loss of 24.9 per cent as emerging markets as a whole suffered. Even the fairly reliable MSCI China delivered a paltry 1.72 per cent, according to FE Analytics, all of which meant the MSCI AC Asia ex Japan index recorded a modest return of 1.16 per cent for the year.
Instead, the best performers were Australia and New Zealand. The MSCI Australia index delivered a return of 2.23 per cent, while the MSCI New Zealand significantly outperformed its regional peers with a return of 9.21 per cent.
Australia has been tarred with the brush of ‘commodities’, another unloved sector last year and now. It is true that Australia has benefited from China’s commodity boom, and a slowdown as that country repositions its economy with a more domestic focus could hamper some parts of the Australian market.
But Paul Hilsley, manager of the Asian Income fund at L&G Investments, says: “The Australian economy continues to rebalance away from investment in resource infrastructure, helped by several interest rate cuts. There are clearly signs of domestic recovery, especially in the housing market, which will be further helped by the weakness of the Australian dollar. A renewal of strength in the Chinese economy would also help bolster the ramp up in resources exports, as well as support GDP through the net trade statistics.”
In addition, both Australia and New Zealand have more in common with developed markets such as the US or the UK.
Mr Hilsley adds: “Australian companies compare particularly well with their regional peers, with strong corporate governance structures and a dividend culture encouraged by the local tax regime.”
However, while exposure to Australia and New Zealand could boost performance, most top-performing funds in the Asia Pacific ex Japan sector have their largest weightings in Hong Kong and China.
The CF Canlife Asia Pacific fund, which has returned 5.66 per cent for the year to March 5, has 56.3 per cent of the portfolio in Hong Kong/China and just 10.9 per cent in Australia.
The second-best performer for the year to date, the Gam Star Asian Equity fund, has 32.65 per cent of the portfolio in Hong Kong, 28.87 per cent in China and no discernible exposure to Australia. Yet, it delivered a 5.15 per cent return.
Once again, performance is not as clear cut as it may seem. The clear winners last year were New Zealand and Australia, but the best performer for 2014 so far is the MSCI Indonesia index, at 14.75 per cent, while the MSCI New Zealand index takes second place with a return of 10.38 per cent.
PICKS
Gam Star Asian Equity fund
Managed by Michael Lai, this Dublin-domiciled fund has had a tricky few years. It languished near the bottom of the sector in 2010, 2011 and 2012, but performance has picked up significantly in the past 12 months, catapulting it into the top quartile in 2013 with a return of 9.29 per cent. It has also started 2014 strongly, one of just 23 funds in the sector of 91 vehicles to produce a positive return. The highest sector weighting is to information technology, at 32.53 per cent of the portfolio. If performance continues in this vein, it could be one to watch.
Pacific Assets Trust
Within the closed-end Asia Pacific ex Japan sector, the best performing investment trust in 2013 was the £186.3m Pacific Assets Trust. While Frostrow Capital provides the non-investment services, First State Investment Management was appointed as investment manager in July 2010, with David Gait the named portfolio manager. It produced a return of 14.22 per cent last year, compared to the AIC Asia Pacific ex Japan Equities sector average of 1.35 per cent.
EDITOR’S PICK
First State Asia Pacific Leaders
One of the many First State Asia funds to have discouraged inflows to prevent capacity constraints, this £5.9bn fund is managed by Angus Tulloch and the recently appointed Richard Jones. It has produced consistent outperformance since its launch in 2003, with a 10-year return of 264.72 per cent compared with the sector average of 167.24 per cent. Performance has dipped lately, recording a loss of 9.66 per cent for the 12 months to March 5 2014, compared with the sector average loss of 8.54 per cent. But with strong managers, time should see this one come back on form.
