Which Asia funds you should buy - and which you still can

In the 17th century, China and India were the world’s leading economic powers. According to Sean Harkin, writing for World Finance, they may have accounted for 60-70 per cent of global economic output at that time.

However, in the era of western industrialisation that followed these Asian giants stagnated, as they failed to modernise and were disrupted by European colonial interference.

According to the IMF, by 2008 the whole of Asia controlled just 21.7 per cent of world financial assets, compared to 38.4 per cent controlled in Western Europe and 26.3 per cent in the US. In other words, a region with a population of some 4.2bn people controls a smaller share of world financial assets than does a single country with a population of 316m.

It is this imbalance that has driven Asian growth in recent decades, as economic reform has paved the way for vast new middle classes to build wealth for the first time.

The high levels of economic growth that have resulted from this change have attracted fresh attention from developed-world investors, leading to an explosion of Asian investment funds into the UK retail market.

Beyond Japan

Today, there are 206 open-ended funds targeting Asian markets listed in the Investment Management Association fund universe, and another 32 investment trusts listed by the Association of Investment Companies.

Asian investment funds are broadly separated by whether or not they invest in Japan, one of the few developed markets in Asia along with South Korea, and home to the third largest economy in the world.

There are nine Asia Pacific including Japan funds in the IMA’s open-ended fund sector for the region. These include the largest fund of its kind, the Matthews Asia Asia Dividend fund, with £495m under management.

But appeal for Asia funds that include Japan is limited. Even the oldest fund in the sector, the 35-year old Aberdeen Asia Pacific & Japan Equity fund, has just £196.7m under management.

Investors who turn to Asia tend to focus on the opportunity for rapid growth that is afforded by the region’s vast range of emerging markets, and it is this thirst for developing-market opportunities that is behind the enormous success of Asia Pacific excluding Japan funds.

The IMA’s sector for the funds contains 92 vehicles, including the two biggest products of their kind: the £8.4bn Templeton Asian Growth fund and £7.3bn First State Asia Pacific Leaders fund.

The latter was launched in 2003 as an alternative to First State’s successful Asia Pacific fund, managed from launch in 1995 by Angus Tulloch, which was forced to ‘soft close’ to new investments in 2003.

Capacity constraint

From its launch to 7 October 2014 the original Asia Pacific fund gained 801 per cent, making it one of the best-performing investment products of all time. However, like other funds targeting emerging markets, when it started growing in size as investors recognised its potential it came up against a problem; capacity constraint.

When a fund that targets relatively small or illiquid markets reaches a certain size it begins to start owning an excessive proportion of the investments it targets. This eventually leads to the fund being left unable to sell out of those holdings efficiently in the event of a market downturn, leading to losses or delays for investors.

A fund facing such constraints has two choices: either it can adopt positions in an increasingly large number of individual holdings at the risk of losing its edge over more ‘concentrated’ rival funds that only buy into the best opportunities, or it can shut the doors to new investors.

BlackRock’s emerging markets chief Jeff Shen soft-closed his Luxembourg-based Asia Extension fund earlier this year. Aberdeen Asset Management last year warned it may take the same action on its successful Asia Pacific fund run by Hugh Young.

China demand

Another key trend in Asian investing has been towards asset managers launching China-specific investment funds, as demand for investments targeting what many believe will soon be the largest economy in the world has spiralled in recent years.

In 2011 the IMA launched a sector specifically for China-only funds and it now contains 37 products. With £2bn under management, Fidelity’s Luxembourg-based China Focus fund run by Jing Ning is the sector’s biggest player, while the GAM Star China Equity fund comes second with £1.5bn.

The sector also houses the First State Greater China Growth fund, which like several of the group’s other funds, including First State Indian Subcontinent, is also soft closed.

Finding an open fund

FTAdviser.com’s sister title Investment Adviser publishes an annually updated list of the 100 best funds and fund managers available to UK retail investors, based on short and long-term performance and a range of screening factors.

One of those screening factors is that soft-closed funds are excluded, so that products included in the Investment Adviser 100 Club are always relevant to fund selectors.

The current members of the 100 Club’s Asia Pacific Equity sector include the First State Asia Pacific Leaders fund, Fidelity Asian Values investment trust run by John Lo, the Invesco Asia Trust, Investec Asia ex Japan fund, and M&G Asian, the £635m product run by Matthew Vaight.

In an era where soft-closes are increasingly inevitable for the most successful Asian products, investors keen to access the region’s growth opportunities should check these funds out while the gates are still open.

John Kenchington is editor of Investment Adviser

john.kenchington@ft.com

Expert picks: Four multi-managers give their top choices

1. Ryan Hughes, fund manager, Apollo Multi Asset Management:

Hermes Asia ex Japan Equity fund

Fund manager: Jonathan Pines

Fund size: £1bn

“The key thing about this fund is its flexibility to aggressively move across the region looking for the best opportunities. As the performance of individual countries across the region polarises, it’s important to be able to adjust the portfolio to reflect this and the contrarian approach is very well suited to this.

“With some of the successful funds of old now so big, the nimble nature of the fund enables manager Jonathan Pines to really be able to take advantage of all opportunities regardless of location or size.”

2. Ian Aylward, head of multi-manager research, Aviva Investors:

First State Asia Pacific Leaders fund

Fund manager: Angus Tulloch

Fund size: £7.3bn

“This has been a long term favourite of ours and currently comprises the bulk of our Asia excluding Japan exposure. It is a truly outstanding fund, outperforming over many years under a team led by the excellent Angus Tulloch.

“We like the team stability, consistent philosophical focus on quality names and the steady nature of the alpha generation.”

3. Caspar Rock, chief investment officer, Architas Multi Manager:

Hermes Asia ex Japan Equity fund

Fund manager: Jonathan Pines

Fund size: £1bn

“We like relative value and they are quite a wonkish bunch of accountants running it. It’s very, very balance-sheet oriented and quite value oriented. Not deep value, but value focused. I think you’ll get some decent downside protection and that’s very important.”

4. Robert Burdett, co-head, F&C Asset Management multi-manager team:

BlackRock BGF Asian Growth Leaders

Fund manager: Andrew Swan

Fund size: $109.7m

“Andrew Swan was poached from Asian investment pioneers JP Morgan, where he was a rising star and potential future regional leader, to build a world class fund management team in the region. He has chosen to do so by leading from the front, by example through this fund.

“His impressive results from the start bode well for BlackRock and we were delighted to get an early look at his process and vision and to back BlackRock’s commitment with our own conviction at an early stage as his new track record is being created.”