The £572m M&G Asian fund has delivered top-quartile performance over three years, returning an impressive 32.7% versus the Asia Pacific ex Japan sector average of 26%.
Fund managers Matthew Vaight and Michael Godfrey, in charge since February 2008, have retained the same investment philosophy of top-slicing holdings when valuation levels peak and exploiting valuation anomalies.
The managers, who aim to achieve a return of 20%-25% on each of the portfolio’s 60 holdings, benefit from M&G’s strict valuation framework, which identifies companies set to thrive over the next five years.
“We look to acquire businesses where we believe the current implied returns of the market price is wrong and this will allow us to exploit that long-term arbitrage,” said Vaight.
“We have a discipline of never overpaying for businesses and history shows us the Asian market has periods where fundamentals matter less and it is all about momentum and newsflow.
“So we stick to our discipline of valuations and look to patiently ignore the short-term noise.”
With such a strong focus on valuations, it is not surprising the managers closely monitor the size of the fund, which has grown by almost £200m in the last two and a half years.
However, Vaight said there are currently no plans to cap the fund as there are more than enough opportunities with a universe of 4,000 companies at his disposal.
“As yet, we are not finding any constraints from liquidity so there no plans to close the fund,” said Vaight.
“We need to make sure we can get into and out of stocks in a reasonable time horizon and this is not a major issue at the moment.”
Meanwhile, the manager believes Asian markets are becoming increasingly short-termist with holding periods now measured in months as opposed to years.
For bottom-up stockpickers such as Vaight, who take longer-term views, this presents an opportunity.
“When we took over the fund we did a lot of work about whether macro themes or GDP growth really mattered in terms of stock market returns.
“We found there was little or no correlation between GDP growth and stock market returns and, if anything, some of the higher growth markets had some of the worst stock market returns because of excessive valuations.
“We look to find companies that have pricing power and discipline, so they can ride out macroeconomic issues such as inflation.”
However, Vaight said he covertly keeps a close eye on macroeconomic trends to ensure the companies in his portfolio can prosper.
“Although we do not start with macro viewpoints, we do look to make sure the companies we are investing in have the ability to manage different macroeconomic environments,” said Vaight.
“Typically, we try to understand and find companies that have the ability to ride out volatility in either an inflationary or deflationary environment.”