All eight funds in the IMA Asia Pacific including Japan sector delivered returns higher than 29% over one year according to Morningstar
While Japan was one of the worst-performing equity markets of 2009, rising only 6.3%, most Asian economies have seen higher growth. This was driven by the Chinese Government’s huge fiscal stimulus that supported its manufacturing and export sectors.
Over one year to 8 January the IMA Asia Pacific including Japan sector gained 44% with all eight funds delivering returns higher than 29% and the top two up more than 57%, according to Morningstar.
Richard Sennitt’s £52m Schroder Asia Income fund tops the sector over three years, up 57.9% compared to an average increase of 44%. Over 12 months, the fund is ranked second, again up 57.9%.
Sennitt believes while near-term uncertainties particularly in Japan warrant some caution, the Far East region will continue to offer investors impressive returns in the medium to long term, supported by strong economic and corporate fundamentals.
Sennitt is heavily underweight Japan with fund exposure totalling 5.9% at 30 November. This compares with weightings of 23.8% to Australia, 17.7% to Hong Kong, 14.1% to Singapore, and 10% in Taiwan.
Schroder Asia Income’s top five holdings are: Taiwan Semiconductor Manufacturing 4.6%; Singapore firm Fortune Real Estate Investment Trust 3.9%, Hong Kong firm Jardine Matheson Holdings 3.2%, Singapore firm Ascendas Real Estate Investment Trust 2.8%, and Hong Kong firm Texwinca Holdings 2.7%.
The top five sector weightings are: financials 41.6%, telecoms 13.8%, materials 9.4%, information technology 9.3%, and consumer discretionary 8.3%.
Sennitt says: “From a broad economic point of view, the region has undergone a dramatic turnaround compared to a decade ago when the Asian financial crisis took hold.
“Today, most countries have low government, company and consumer debt levels while economic growth is also increasingly driven from within Asia and underpinned by a growing population with strong income growth.”
The manager notes corporate culture in Asia is showing greater maturity, with an increasing focus on shareholder value and dividend payments.
“Overall, companies are in strong financial shape; balance sheets are healthy, cashflows are good, dividend payments have been rising and capital expenditure is increasingly disciplined,” he says.
“We believe investors should be encouraged by the improvements we have seen across the region and start rewarding high-quality companies that we have identified.”
Stuart Parks’ £208m Invesco Perpetual Pacific fund has climbed 49% over the last year.
Parks says asset allocation has been consistently adding value, and in particular he has had a fairly consistent underweight to Japan in the fund.
However, he says, there have been times when he has increased Japanese weightings, which have coincided with periods of outperformance in the Japanese market.
Japan is the largest country of investment, accounting for 39.3% of the fund’s exposure followed by Hong Kong 16.4%, Korea 9.8%, Australia 9.3%, Taiwan 7.9%, China 7.6%, and India 5% at 30 November.
“The Japanese element of the fund is concentrated on financials and large car and electronics exporters, where we see compelling value,” Parks says.
The portfolio’s biggest weightings are to the financials, information technology, industrials, consumer discretionary and consumer staples sectors accounting for 38.3%, 22.5%, 14.3%, 10.4% and 6.5% respectively.
Parks says: “The fund has significant positions in sectors we believe can benefit from rising consumer demand.
“This includes areas directly impacted by greater affluence among Asian consumers, such as household products, food and beverages, as well as insurance and real estate, which we believe will also experience positive long-term trends.”
The manager says the fund’s strong geographical positions in China and India reflect his expectations they will lead consumption growth in the years ahead.
“The semiconductor sector is also a major part of the fund and we have significant positions in global, industry leaders. We are more cautious on cyclical sectors, such as materials, as we believe valuations are expensive,” he adds.
Parks’ top 10 positions include Taiwan Semiconductor, Mitsubishi UFJ and Sumitomo Mitsui Financial. The top holding in the fund is Korean firm Samsung Electronics at 2.8%.
Looking forward, he says: “What we are looking for is a continuation of interest in all of the Asian markets. I think people now recognise that Asia ex-Japan, China and India have got a domestic demand which sets them apart from some of less quickly growing markets of the developed word.”
Jane Andrews, who has managed the Smith and Williamson Far Eastern Growth fund since its 1996 launch, has delivered consistently impressive returns. Over five years, three years and one year the fund has gained 103%, 59.3% and again 59.3% respectively.
The fund has an emphasis on Japan but has the flexibility to vary geographical investment throughout the Far East.
Andrews notes that during November Asian markets rallied with the exception of Japan where the Nikkei index fell by 6.8%. However, as sterling investors the impact on the Smith and Williams Far Eastern Growth fund was tempered by the strength of the yen which reached a fourteen year high during the month.
Andrews says: “The strong yen coupled with numerous capital raisings, many that seemed purely opportunistic, weighed on Japan. The new DPJ government have so far failed to live up to expectations and disappointed those who were expecting change.”
Geographic weightings in the fund were virtually unchanged during November. The top five overweight sectors at 30 November were: general industrials, real estate, food producers, construction and materials, and healthcare equipment and services at 5.6%, 4.1%, 3.7%, 2.9%, and 2.8% respectively.
Underweight sectors include banks, automobiles, leisure and goods, industrial metals and pharmaceuticals and biotechnology at -8.5%,-3.7%, -3.1%, -2.8%, and -2.2% respectively.
The manager says: “Commodities, especially gold, performed well as the US dollar continued to weaken. Australian resources had a good month and the addition of Aquila Resources, a coal and iron ore stock, was helpful to performance,”
Hong Kong/China is the largest country of investment, accounting for 32.9% of the fund’s exposure followed by Japan 21.5%, Australia 15.4%, Singapore 11.4% and Taiwan 5.3%.
Andrews says: “There was much talk about the possibility of the Chinese allowing the renminbi to appreciate but this seems unlikely in the short term. China is steadily recovering with consumption continuing to show good growth.
“Liquidity remains ample and loan growth should pick up again in the first quarter of next year. The MSCI China index is trading on a price earnings multiple of 14 with 22% earnings growth forecast for 2010.”
NB: Please note Morningstar stats list the Schroders fund as Schroder Far East. In December the firm changed the fund title to Schroder Asia Income.
