The MSCI AC Asia ex Japan index has lagged developed world indices this year, having suffered a sharp sell-off over the summer when the US first threatened to withdraw its quantitative easing programme.
The region was the darling of the long-term investor for many years, but retail fund flows turned negative in August, according to IMA data, although they have since returned to positive numbers.
Performance of indices in 2013
Source: FE Analytics
Some managers, such as FE Alpha Manager Anthony Eaton, say that the sell-off has created a superb buying opportunity, with many assets in the region now seriously undervalued.
Eaton runs a global fund, CF JM Finn Global Opportunities, and says he is retaining his high weighting to the region, which he expects to be the major driver of global growth for decades to come.
He points out that it is possible to buy Frankfurt Airport for 20 times earnings or Beijing Airport on nine times earnings – and the growth is going to come from the latter facility.
The manager also says that the REITs he owns are now yielding 7 per cent, up from 4 per cent, while tenants are continuing to renew and rental rates are rising.
"You are seeing tangible value in Asia," he said.
Eaton adds that the hot money that deserted the region over the summer was a problem for funds like his that are well-ensconced in the region, but he is not changing his approach.
"We are really an Asia-focused fund, so we have struggled over the summer, but investment in Asia is comprised of the long-term money and the 'flippy' money that exited because of concerns over tapering. But when the smoke clears, nothing has changed."
Eaton says that the growing middle class in Asia, with low debt and low levels of benefits, will continue to support the region’s markets in the coming years.
Data from FE Analytics shows that CF JM Finn Global Opportunities, while underperforming the majority of funds in the IMA Global sector due to their focus on the developed world, has improved on the returns of the Asian indices thanks to its diversified approach.
Performance of fund vs sector and index in 2013
Source: FE Analytics
Eaton explained more about his strategy and positioning in a recent FE Trustnet article.
Tim Dickson, manager of the £18.1m Invesco Perpetual Asian Equity Income fund, is also bullish on the long-term prospects, although he cautions that returns in the region are likely to be lower than they were in recent years.
"Manufacturing in Asia remains cheaper, but the difference is less than before, so we have to get used to lower growth rates," he said.
"However, the developed world will be growing more slowly, so margins will still be significant, meaning Asian economies will still stack up well."
"Whether that feeds through into earnings growth is a different matter: the links between economic growth and stock market performance are at best weak and some studies suggest negatively correlated. However, the region will still look relatively robust to the western world."
Dickson’s portfolio is a relatively new candidate in the Asian equity income sector: the fund was launched in March 2011.
Data from FE Analytics shows that the fund has outperformed its peer group since launch, returning 15.56 per cent to the sector’s 8.98 per cent.
Performance of fund vs sector since Mar 2011
Source: FE Analytics
Dickson says that the Philippines is one of the few countries that looks like it could repeat the strong growth of the wider region over the past decade.
He points out the government is getting a handle on the fiscal deficit and the interest rates in the country, and that it was left out of the boom in previous years, meaning it has greater potential.
In the wider region, Dickson says that return on capital will start to pick up again but not yet.
He points out that earnings growth in the market surprised on the downside in 2012. Analysts expected double figures, but the real growth was just 4 per cent. Expectations are again for double figures, but Dickson says 6 or 7 per cent is more likely.
Both Dickson and Eaton acknowledge that the ongoing uncertainty about tapering will continue to weigh on markets in the short-term and that this is the issue for investors trying to time their entry into the market.
F&C’s Gary Potter says that he remains underweight in his multi-asset funds of funds because of the ongoing uncertainty about Fed policy.
"We might take a more positive outlook soon, having been underweight," he said. "Asia is cheap in price/book terms, but might get a bit cheaper – there are the concerns about QE to address."
"So it’s too early to say Asia is fine, but Asia is slowing down and that’s an issue."
Potter has rotated his Asian exposure into two new funds, which he talked to FE Trustnet about this morning.
For investors hoping that the continent's poor period would have opened up discounts on investment trusts, the news is disappointing: discounts don’t seem to have moved a great deal.
Income funds and smaller companies funds from Aberdeen and First State are trading on premiums near to or higher than their three-year figures.
First State’s Pacific Assets Trust is on a 2.93 per cent discount compared with a one-year figure of 6.6 per cent.
There is some value out there, however: Aberdeen New Dawn is on a 9.66 per cent discount compared with a one-year average of 6.81 per cent.
Edinburgh Dragon Trust is on a 9.27 per cent discount compared with a 6.81 per cent one-year average, although the manager Andrew Gillan left the firm this week.
Fidelity Asian Values and the JP Morgan Asian Investment Trust are trading on tighter discounts than their one-year averages, having performed better than their Aberdeen and First State peers this year in NAV terms.
Charles Stanley’s Stephen Peters says that investors would be better off looking for the best managers rather than trying to play discounts.
He also suggests the region would need to underperform for six months to a year more for substantial discounts to open up.
The analyst, who specialises in investment trusts, suggests that investors should consider open-ended funds for exposure.
There isn’t a great variety of approaches in the sector, he says, which is dominated by the Aberdeen and First State funds that have been underperforming of late.
FE Trustnet recently looked at some lesser-known funds in the region that have been performing strongly in recent years.
