Meet the manager: Andrew Beal, Henderson TR Pacific

The fund rates two Crowns under the Financial Express ratings system, which places it in the top four out of 19 in its sector, while NAV (net asset value) performance over three years places it middle of the pack, according to Trustnet data.

Despite the rating and performance, the fund's factsheet is not among the most viewed in its sector. Instead it is sister fund Henderson Far East, distinguished by its focus on income, which tops the views over the past month, six months and one year. TR Pacific seeks total returns, which involves an emphasis on accessing growth in Asia.

Andrew Beal, manager of TR Pacific, is currently keen to focus on the positive long-term opportunities in his chosen region, in line with the growth mandate of the fund.

Although the performance of the fund's share price and NAV this year have gone in the same direction as the benchmark MSCI Asia ex-Japan index – down – the Asian story remains strong, particularly with regard to the biggest player China, he says.

Performance versus benchmark	1 year	3 year	5 year
HENDERSON TR PACIFIC IT	-44.5	-1.0	+16.7
NAV	-41.3	+2.0	+21.5
Asia Pacific Excluding Jap	-36.7	-5.9	+38.4
MSCI AC ASIA EX JAPAN INDEX	-46.8	-2.9	+34.1

Source: Trustnet to 15 December 2008

By way of context, Beal says that Asia remembers a hitherto far worse financial apocalypse just a decade ago. Korea’s GDP fell 10 per cent in one year in the late 1990s Asian meltdown, while corporations and households alike defaulted on debt.

Today public sector debt levels are below those seen in the West. China has a government debt-to-GDP ratio of 17 per cent; major banks are maintaining Tier 1 capitalisation rates of about 15 per cent on average, and they have high loan-to-deposit rates; consumer debt is low; the Chinese mortgage market is equivalent to 11 per cent of GDP, India’s is seven per cent, against the UK’s 87 per cent; corporate debt-to-equity levels average “in the low teens”. 

FTSE All Share versus Asia Pacific ex-Japan returns



By a raft of measures Asia is far better placed to ride out the global economic crisis than countries in the West, Beal says.

Two factors in particular will, however, dictate the direction of change going forward. Exports will fall and commodities prices have already slumped, Beal notes. The former will hurt economic growth in Asia, but the latter will assist, especially for those such as China which have previously struggled with inflated prices of imported commodities. For those shocked by some of the statistics over regional stock market performance there are technical answers that need to be considered.

For example, when hedge funds faced margin calls after the Lehman Brothers disaster, Asia was the easiest place to raise cash quickly, Beal argues. Also, local markets lack the same exposure to institutional investors as markets in the West. They are seen as a place for punters rather than pension funds. The lack of long-term thinking exacerbates the falls.

"You are left with a domestic shareholder base, which is retail dominated and has historically seen the stockmarket as a great big casino. You don't save through equities, you punt in equities. The cash for your kids education goes in the bank," he says. 

"Retail punters who are not long-term in their thinking, faced with a wall of selling from foreigners don't look at P/E ratios or price-to-book and say 'this is good value I like the yield', they panic along with everbody else."

This has led to the situation whereby China underperformed Argentina through the year to November, something Beal calls “staggering”. Meanwhile, the global economic crisis will result in some key changes in the way economies work in the region, he believes.

Premier among these is the expectation people will start to spend their savings. The Chinese model of growth based on exports has meant a government wary of domestic inflation in order to keep the exports cheap.

“Time is up on that model,” Beal says.

Policymakers know that they cannot export their way out of the current crisis. A change in model cannot occur overnight. In China’s case, however, there are some advantages, for example its population. The government is stimulating domestic demand with a recent $600bn fiscal package and monetary easing – the scale of which puts UK measures announced in the recent Pre-Budget Report in the shade.

The Government has raised the tax threshold by 50 per cent, from 2,000 renminbi, about $250 at prevailing exchange rates, to 3,000 renminbi. This has immediately taken 100 million people out of the tax system, Beal says.

There is realisation that a social safety net needs to be in place, otherwise people will always carry massive savings - thereby countering efforts to encourage domestic economic development apart from export-driven growth. Hence the country is moving towards national healthcare measures and a retirement savings system. There is also focus on spreading the country’s wealth, especially with a focus on agricultural areas.

The legal system is developing – important from an external investor’s point of view. Corporate governance transparency is improving, although there is some way to go. Investors are also benefiting from the government not instituting knee-jerk policy decisions: China introduced shorting to the A Shares in Shanghai pretty much at the same time the rest of the world moved to make shorting more difficult.

Sitting on hands

Despite the long-term positives, Beal notes he only did two transactions through October – one buy and one sell – to change the portfolio of the trust as churn levels have continued to drop. 

"Sensible investment gets more and more Warren Buffett-like. If you are selling stocks when they in the top quartile of their historic valuations ranges, and buying at the bottom quartile, over three to five years you will make an awful lot of money. We are clearly in the bottom quartile of historic valuation ranges."

"I would add to that Asia has been unfairly punished relative to its fundamentals. I see a big opportunity, but it requires being long term in thinking. Our churn is down a lot, because at the moment I am picking stocks I want to own on a five-year view. I know next year will be a complete write-off for a lot of companies."

Beal says there are companies in his portfolio that will not make a profit in 2009, but they are in the portfolio because they have cash, and no funding issues. These companies will be in a strong position once the market comes out of its downturn, Beal says. He expects the bottom sometime in the next six to 12 months, although it could come sooner in Asia than elsewhere; October 27 saw price-to-book multiples come close to the levels seen in the crisis of the late 1990s. That said, however, turning over the portfolio on short-term bets is not wise in the current trading conditions.

"This market is just not the market for turning the portfolio. If there is something in the portfolio you do not love, and there are other stocks for which you've spent the last three years thinking 'I'd really like to own that, but it's just too expensive', that's when switches can occur."

Beal recently sold Malaysian leisure company Resorts World in favour of a Chinese online travel business Seatrip because the latter stands a better chance of growing earnings next year. The Chinese business has cash on its books and is likely to grow its earnings 20-25 per cent through 2009. A year ago it traded  on a P/E of 16x, but can be bought for 14x. That is a reason to consider switches.

Countries and sectors

India is seen as a different place to China. It has grown but with far lower capital expenditure, which means it has grown its services sector faster. Deposits in Indian banks are also lower, while the current account and capital accounts are in deficit, Beal says. 

Here, ICIC, the bank, is seen as a good bet on domestic banks growing across the country, into areas that were poorly served previously. Also, India has benefitted from a period of growth in dynamic smaller companies – some which have grown larger, such as IT services provider Infosys – and an emerging entrepreneurial class. This has been of most benefit in its invisible exports, for example, with the country now taking a lead in the carbon trading market.

Beal says Korea is the main worry among the other regional markets. It is a big exporter, has higher debt levels, and both the banking and SME sectors are stressed. The trust is currently underweight Korea.

Indonesia is prone to capital flight, but is in a very different situation to the late 1990s. The system is better placed. However, it is vulnerable simply because it is Indonesia, Beal says.