Japanese, emerging market and European equities all offer more exciting investment opportunities than the UK, according to Shore Financial Planning’s Ben Yearsley (pictured), who has been buying into these three regions recently. 
While the managing director is sanguine regarding the UK’s economic backdrop, he believes investors with genuinely long-term time horizons should look elsewhere to maximise their growth prospects.
“I haven’t topped up any UK holdings this summer,” he said. “I’ve traded in and out of investment trusts pre- and post-election, but everything I’ve added to has been in Asia and Japan. We have also increased our exposure to Europe, as well.”
“We like the regions – we’re big fans of Japan and Asia in particular. I was keen to move away from sterling and that seemed to be the obvious way of doing it.
“By buying areas I like that I think are cheaper than the UK and that are going to grow over the long term, it’s killing lots of birds with one stone.”
In the below article, Yearsley discusses the benefits that each region can offer investors and which funds he thinks offer the best approach to accessing these market areas.
Asia and emerging markets
Yearsley said superior growth prospects and strong demographics remain significant tailwinds for Asia and emerging markets over the long term.
“If you’re a long-term investor – I’m talking 10 years plus - your portfolio should be stuffed full of Asian and emerging markets,” the managing director said.
“If you’re a short-term investor, don’t do it because of volatility. Who knows what is going to happen when the reversal of QE starts in the US.
“Even if China falls on the back of QE withdrawal in the States, it’s a good buying opportunity and I would buy it today in the full knowledge that it might happen anyway.”
One fund Yearsley has been buying into recently is First State Asia Focus, which was launched by FE Alpha Manager Martin Lau in 2015. He was joined by co-manager and fellow FE Alpha Manager Richard Jones in June last year.
The £91m fund aims to provide long-term capital growth through a relatively concentrated portfolio of 61 stocks. These are chosen with an absolute return mindset, with the team focusing as much on capital preservation as it does growth prospects when selecting each stock.
Examples of its largest individual constituents include Taiwan Semiconductor, Indian financial services company HDFC Bank and the FS Indian Subcontinent III fund.
Since launch, it has underperformed its average peer and benchmark by 7.22 and 11.74 percentage points respectively with a total return of 66.45 per cent. It has done so with top-quartile maximum drawdown (which measures the most money lost if bought and sold at the worst possible times), Sharpe ratio (which measures risk-adjusted returns) and annualised volatility.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
While the fund has underperformed over the course of its track record, investors should note that two years is a short period of time and that the managers have a very long-term time horizon.
The research team at Square Mile, who awarded the fund an ‘AA’ rating for the team’s long-term track record managing previous vehicles, said: “We see this fund as a very strong and wholly viable option for long-term investors who wish to access the region, but in a more conservative manner, where the emphasis is on identifying high quality growth companies.”
First State Asia Focus has a clean ongoing charges figure (OCF) of 1.04 per cent.
Japan
Yearsley said that, not only are Japanese equities cheap from a price-earnings ratio and price-to-book perspective, but there is high dividend cover in the country on average. According to the managing director, this means there is “huge scope” for dividend appreciation in Japan.
“I think [Japanese prime minister] Abe’s reforms are promising,” he said. “There appears to be some inflation coming through into the system – they’re not going to hit their target but it’s still better than nothing.
“They’ve realised the negative yields on the Japanese government bonds are basically bonkers, and actually I think it’s a really exciting time.”
Yearsley’s fund pick to gain exposure to the country is JOHCM Japan, which has been co-managed by Scott McGlashan and Ruth Nash since 2004 and 2005 respectively.
The £448m fund adopts a bottom-up approach to stock selection and has a particular focus on small-and mid-caps which have been undervalued by the broader market but have strong balance sheets. Examples of its largest individual holdings include holding company Concordia Financial, building construction company Maeda and insurance firm Tokio Marine.
Over five years, the fund has returned 104.65 per cent compared to its average peer and benchmark’s respective returns of 115.78 and 121.67 per cent. It has done so with a third-quartile Sharpe ratio and maximum drawdown, as well as a bottom-quartile annualised volatility, which suggests it may not be best-suited to the more cautious investor.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
That said, it has achieved top-quartile returns over the last decade, having comfortably beaten its sector average and benchmark with a total return of 131.73 per cent.
Investors should note that the fund is currently soft-closed and, while it is no longer available to new direct investors, existing investors can continue to invest in the vehicle.
JOHCM Japan has a clean OCF of 0.86 per cent.
Europe
There has been a much debate recently as to whether there is value left in European equities, following their strong run year-to-date. Yearsley said that, while the market area is no longer cheap, there are still potential tailwinds on the cards for sterling investors with European exposure.
“I have been in Europe in a much bigger way over the last year. I initially thought it was under-owned, under-loved and cheap,” he said. “I think the cheapness is largely gone, although it’s not expensive. I think you have had the best of the run of the euro and, if it strengthens more, you could start running into problems.
“If that happened, I would potentially take some profit. But at the moment, with the euro strengthening against sterling, you’re making money.
“So, there’s no need to panic because you’re hedged against equities falling – your value is going up anyway.”
One regional fund the managing director has been adding to is Henderson European Focus which, while he pointed out is flexible in mandate, is currently adopting more of a value bias.
The four crown-rated fund has been headed up by John Bennett and Asim Rahman since 2010 and 2014 respectively.
The managers combine industry analysis with bottom-up stock selection, which results in a relatively concentrated portfolio that now stands at 49 stocks.
Bennett and Rahman will also adopt a global view in order to identify any trends that they believe are sustainable over the long term. Examples of its largest individual holdings include Nestlé, Carlsberg and German internet services company United Internet.
Over five years, the £565m fund – which isn’t benchmarked against an index - has outperformed its average peer by 13.17 percentage points with a total return of 113.76 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
In terms of risk metrics over this time frame, it is in the top quartile for its annualised volatility and Sharpe ratio, and is in the second quartile for its maximum drawdown.
Henderson European Focus has a clean OCF of 0.85 per cent.