Trade tensions, a strong dollar, rising US interest rates and idiosyncratic issues in Turkey, Argentina and Brazil have all taken their toll.
Although sentiment is currently weak, investors tend to forget that these regions are incredibly diverse and not all created equal.
If you can look past the latest ‘Trump Tweet’ and focus on the long term, Asia in particular looks exciting.
Home to more than four billion people (more than half of the world's population), the Asia Pacific region is both developed and developing. Its dynamic, expanding and increasingly wealthy population is driving economic change and creating a multitude of opportunities.
The region is no longer the ‘workshop of the world’: it is now a key marketplace for cars, phones, clothing, luxury goods, healthcare and financial services.
The one-in, one-out policy means that the managers’ sell-discipline is very rigorous – it is often easier to identify a company to invest in, than it is to identify one that should be sold.While the region looked relatively cheap compared with its western peers earlier this year, the recent sell-off has made Asia and the emerging markets even more attractive on a valuation basis.
A newly Elite Rated fund in this area, which is refreshingly different, is Guinness Asian Equity Income.
Managed by Edmund Harriss and Mark Hammonds since its launch five years ago, the fund is different because it invests in 36 companies, and each position is equally weighted. This, together with their one-in, one-out policy means there isn’t a long tail of smaller holdings, so each stock can make a meaningful contribution to performance.
The managers favour well-run companies that have fallen out of favour in the short-term, but have historically shown an ability to perform in both good and bad economic environments.
They find these companies by screening for specific characteristics, using Guinness' proprietary modelling systems. For example, they look for companies that have generated a ‘real return’ on investment of at least 8 per cent for each of the past eight years.
Why is eight the magic number?
According to the managers, the real return strips out the variation in inflation that you find across the Asian region, and the 8 per cent threshold provides them with confidence that a company is creating value.
If a company can do this every year for eight years, it implies consistency. It indicates that a company is not cyclical and therefore dependent on a certain economic environment to perform well.
Only around 7 per cent of Asian listed companies get through this screen and the managers then reduce their universe further by excluding companies that are less than $500m in size or have a debt to equity ratio greater than one.
This leaves them with around 300 companies to research more thoroughly, with in-depth modelling of the businesses’ cash flow, capital budgeting and – last but by no means least – potential for dividend growth.
Income investors may, at first, be wary of the dividend consideration coming so late in the process, but this shouldn’t be the case: the fund has a historic yield of 3.7 per cent, with underlying holdings picked for future dividend growth too.
The one-in, one-out policy means that the managers’ sell-discipline is very rigorous – it is often easier to identify a company to invest in, than it is to identify one that should be sold.
The holdings are rebalanced periodically to retain the equal weightings and continually assessed to see if there are better opportunities.
Having said that, turnover is relatively low (holdings are generally kept in the portfolio for three to five years).
For income investors looking to diversify their portfolio, or total return investors looking to benefit from the growth on offer in the region, this fund is well worth a look.
Darius McDermott is managing director of FundCalibre
