These funds are highly rated among industry professionals, and with good reason – but there is a downside to holding a fast-growing fund, no matter how good the manager is.
Mass inflows are often hard to manage, particularly in illiquid markets. Greater fund size can also hamper a fund manager’s flexibility, forcing them to move out of small and mid cap companies in favour of larger ones.
As FE Alpha Manager David Coombs alluded to in a recent interview with FE Trustnet, some managers find it difficult to replicate the performance that helped build their reputation, leaving new investors disappointed.
"With funds getting so big, it’s about finding the next big seller in an area, which still has the flexibility to invest in what it wants," said Coombs.
With this in mind, FE Trustnet will look at alternatives to giant funds across a number of different sectors in the coming weeks – starting with IMA Asia Pacific ex Japan.
Jason Pidcock’s Newton Asian Income fund has topped both the performance and sales charts in recent years.
It is a top-decile performer in its sector over three and five years and since its launch in November 2005.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The fund is also one of the highest yielders in the sector, at 4.12 per cent, and one of the least volatile.
This stellar performance has resulted, inevitably, in mass inflows. According to FE Analytics, assets under management (AUM) have grown from £776m to £3.42bn in the space of two years.
Our data shows that Newton Asian Income is the eighth bestselling portfolio in the entire IMA universe over the past 12 months, with inflows of more than £1bn.
For anyone worried about the volume – and speed – of inflows, then the Schroder Asian Income fund is a viable alternative.
Richard Sennitt’s fund is similar to its Newton rival, targeting a growing yield as well as capital growth by investing in the Asia Pacific region. They both also have five FE Crowns.
However, with AUM of £332m, it is around one-tenth of the size of Newton Asian Income, and therefore much more flexible.
It also is not hampered by mass inflows every month; FE data shows the fund has attracted £85m in the past year.
Schroder Asian Income targets undervalued businesses with the capacity to grow and win market-share, and that pay a sustainable and growing dividend.
Sennitt likes companies with recurring cash-flows such as telecoms, which can rely on subscriptions, and he ensures he has a clear understanding of where the companies he holds make their money.
The fund invests in most of the Asia Pacific region, with Australia and Hong Kong its biggest regional weightings, and generally avoids Korea due to its lack of a dividend-paying culture.
Like Newton Asian Income, its focus on quality means that it tends to get left behind during market rallies, but it protects much more effectively against the downside.
The fund’s standout year was in 2008, when it lost just 22.8 per cent. This may not sound like a great achievement, but given that the fund’s benchmark lost more than twice as much, it was a very good showing.
In spite of its defensive bias, the fund still managed to beat its peers and benchmark in the rising markets of 2010 and only fell slightly short in 2009.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
On a cumulative basis, this has translated into top-decile returns over five years of 91.14 per cent, compared with 19.52 per cent from its benchmark and 53.4 per cent from its sector average.
Schroder Asian Income has also significantly outperformed both its sector and the index over one and three years and has also been consistently less volatile.
Performance of fund vs sector and index over 5-yrs
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) |
|---|---|---|---|
| Newton - Asian Income | 25.03 | 70.15 | 120.98 |
| Schroder - Asian Income | 25.21 | 52.75 | 91.14 |
| UT Asia Pacific Excluding Japan | 17.95 | 27.97 | 53.4 |
| MSCI AC Asia Pacific ex Japan | 14.43 | 22.88 | 19.52 |
Source: FE Analytics
Newton Asian Income has a superior record over three and five years and is also consistently less volatile – albeit only marginally.
However, for the reasons outlined earlier, there are question marks over whether the manager will be able to repeat this in the future.
Schroder Asian Income is currently yielding 3.75 – less than its Newton rival, but still one of the highest figures in the sector.
The fund is less reliant on Australasia, with a weighting of 25 per cent compared with Newton Asian Income’s 33 per cent.
This could help it from a growth perspective in the future; it beat Pidcock’s portfolio in the recent global equity market rally.
The funds’ sector weightings are relatively similar, with financials, telecoms and industrials taking the biggest share.
Sennitt’s biggest single stock positions include Bank of China, Glow Energy – a power and utility company in Thailand, and Amcor – an Australian-based multinational packaging business.
They are both heavily diversified, with few holdings accounting for more than 3 per cent of AUM.
Rob Morgan, investment analyst at Hargreaves Lansdown, thinks Schroder Asian Income is an ideal alternative to Newton Asian Income for anyone worried about inflows.
Talking about such concerns, he said: "It’s a fair point – so far Pidcock has dealt very well with the inflows, but it could be a problem in the future."
"We met with Richard Sennitt recently and were impressed, though at the moment still prefer the Newton fund. It hasn’t had the inflows of Newton Asian Income, so arguably the manager does have more flexibility in the future."
Morgan points to Artemis UK Special Situations as an example of a fund that has found it difficult to replicate past performance because of heavy inflows.
"It had a small and mid cap focus and delivered some very strong returns," he said. "It’s now over £1bn in size and has struggled to match the returns relative to its benchmark in the last couple of years."
"It’s not a bad fund by any means, but has definitely gone further up the market cap scale recently."
FE Research’s Rob Gleeson also likes Schroder Asian Income, but sees it as more of general play on the market, rather than one that complements a high-conviction view on emerging Asia.
"The fund's cautious approach and focus on high-quality businesses make it a core holding in the region, rather than a speculative one," he said.
Schroder Asian Income was launched in 1990 but changed its investment objectives when Sennitt took over in 2006 to meet clients’ demand for income. This also led the fund to drop its exposure to Japan.
For this reason, it is unfair to look at performance prior to Sennitt’s appointment.
It requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.7 per cent. Pidcock’s Newton fund has a TER of 1.66 per cent.
In the next article in the series, FE Trustnet will look at an alternative to the £5.13bn M&G Recovery fund.