The past year has seen a lot of fluctuation in markets – particularly in China and India. The former, in particular has seen major ups and downs in its economy throughout 2015. Its growth has been a concern for many investors, as managers can never be sure how true the figures really are. Despite this, the Chinese middle class has been booming for the past few years and the economy is decreasing its reliance on exports.
Looking at the MSCI China versus MSCI India and MSCI Japan, it is clear that perhaps investing in Japan this year would have been more beneficial to investors. Although this may change soon as it was recently announced the country’s economy has fallen back into recession for the fourth time in five years.
Chart 1 shows all three indices over one year to 1 December 2015 rebased to 0 per cent. China has definitely suffered over the past year, but is starting to show there may be signs of improvement and rebalance.
Slowing global growth, and particularly emerging market growth, has had an impact on investor sentiment. Asian stocks, however, have always remained popular because they are generally cheaper to buy and growth in many countries is greater than those already developed markets. And although far from the only country in the sector, China is one of the biggest growth stories in the past two decades. It is now the second largest economy in the world, and the largest in Asia. India remains one of the biggest economies, and although it saw a great start to 2015, the latter half has not seen it fare as well, as investors wait for prime minister Narendra Modi’s economic reforms to come into force. Thailand and Korea have also seen an increase in investor interest, as well as many new frontier markets funds being launched over the years covering markets such as Bangladesh and Taiwan.
In it for the long term
Over the past year, it is clear that the larger economies suffering from headwinds has affected investments, although long-term investors would have benefited. The Investment Association (IA) states that funds must invest at least 80 per cent of their assets in Asia Pacific equities and exclude Japanese securities. However, funds are able to invest up to 5 per cent (but no more) of total assets in Japanese equities to allow for any flexibility for corporate actions. Investors can keep in mind there is a separate sector for Chinese funds, so this sector is best suited for those who want to invest in the wider Asian markets.
Looking at Table 1, the top performing unit trust over five years has been the Stewart Investors Asia Pacific Sustainability fund, which formerly operated as First State and has now been renamed. The fund saw a return of £1,564 over five years (9.4 per cent annualised) based on an initial £1,000 investment, but has been less successful over the past year – it has seen a drop to £966 over 12 months. The fund, managed by David Gait and Sashi Reddy, invests predominantly in Indian equities (33.7 per cent as at end of October 2015). Its largest holding – 6.3 per cent – is in Hong Kong-based company Vitasoy International, a food and drink brand in the region. However, the fund does not massively invest in Hong Kong, with its investments totalling 7.4 per cent of the fund. Stewart Investors takes the top three spots in the Table.
Top of the table
On the closed-ended side, Pacific Assets Trust is the best performing investment trust, which is also sub-managed by First State and the same team that runs the Stewart Asia Pacific Sustainability fund. The trust has an almost identical allocation to the unit trusts and saw returns of £1,633 over five years and £956 over one.
The second-best performing trust is the Schroder Oriental Income, which saw a return of £1,475. The company is managed by Matthew Dobbs, but this fund differs from others as it is more Pacific-focused. The fund’s highest allocation is in Australia, with 22.5 per cent.
Investment trusts generally outperform unit trusts but this sector performs roughly the same – with slightly better long-term results coming from investment trusts as can be predicted.
With 92 funds in the Asia Pacific ex Japan sector, there is plenty of choice with different allocation and risk levels.
FIVE QUESTIONS TO ASK
What currency is the fund denominated in?
The majority of funds will be in sterling, but some may choose the US dollar to make it cheaper to run and for the end investor. It is important to check first, as there could be added risk should there be a correction in any market.
In which countries does it invest?
The Asia Pacific ex Japan sector invests in a wide array of countries, and can include Australia. The only stipulation is the funds can only have up to 5 per cent in Japan. But there is an Asia Pacific including Japan sector for investors who want to have more access to Japan.
What are the risk levels like?
As expected, investing in Asia can have much higher risks than investing in UK equities. The emerging markets tend to have much higher volatility levels. Also check to see where the fund manager is based. It may be more beneficial to have an Asia-based manager who is closer to the action and management teams of companies.
Are frontier markets included?
Sometimes, yes. But be aware frontier markets can be more expensive because they are harder to access, and many managers may not want to invest in such risky markets. Despite the countries having potentially higher growth prospects, many funds may choose to have an allocation to companies but that are domiciled in a developed market.
What market cap is used?
This can depend on the fund, but the majority will invest in mid- or large-cap companies. This can be because the smaller-cap firms may pose additional risks.
