Stewart Investors Asia Pacific Leaders remains a good core Asian equities holding in a portfolio despite two years of underperformance and a particularly disappointing 2017, according to several industry experts.
Last year it was the second-most sold fund, shedding £1.9bn despite performance contributing £1.1bn to assets under management (AUM). As such, the portfolio’s assets fell from £9.2bn to £8.5bn by the end of the year. Since then its AUM has fallen to £7.8bn.
The portfolio was taken over by Sashi Reddy and FE Alpha Manager David Gait from Angus Tulloch in June 2016, although Gait had been co-manager on the fund since 2015.
The five FE Crown-rated fund, which has a yield of 1.06 per cent and a clean ongoing charges figure (OCF) of 0.89 per cent, underperformed the MSCI AC Asia Pacific ex Japan benchmark in 2016 for the first time since 2013 by 7.7 percentage points.
Performance of fund vs benchmark in 2016
Source: FE Analytics
Gill Hutchison, research director at The Adviser Centre, said that the fund is not designed to shoot the lights out when the market is rising.
“Philosophically, the team-members think of themselves as ‘responsible stewards of capital’. Capital preservation is at the forefront of their minds and they think about risk in terms of the permanent loss of their clients’ savings,” she said.
“They also believe that the most rewarding investments lie with companies that are concerned about their customers, employees, suppliers and the larger community.”
She added: “Therefore, the managers are not concerned about the fund’s positioning relative to benchmarks, or peer funds, and this means that the fund follows its own path in terms of risk and return.”
This was particularly evident last year, when the market delivered a total return of 25.04 per cent compared with the fund’s 13.45 per cent.
Darius McDermott, managing director of Chelsea Financial Services, said that it is in fact the past 12 months that have dampened relative performance and not the last two years.
“This is because the fund has not been invested in the Chinese tech stocks such as Alibaba and Tencent,” he said.
“It has been more cautiously positioned, as the managers believed equity markets were approaching bubble territory.”
Indeed, over the past year, Tilney managing director Jason Hollands noted that both Tencent and Alibaba, two of the biggest constituents in the MSCI China Index, returned 94 per cent and 79 per cent respectively during 2017.
“The managers avoid fashionable momentum stocks and the fund has long had a structural underweight to China, with no holdings in Alibaba or Tencent, and minimal exposure to Chinese mainland stocks,” he said.
The portfolio has less than 1.1 per cent in mainland China and instead has a big position in India – 31.2 per cent versus an index weighting to 8.2 per cent – as well as other positions in Taiwan (19.8 per cent) and Hong Kong (16.7 per cent).
However, the fund should hold up better in falling markets and its ideology to preserve capital has provided it with strong long-term numbers.
“Historically it has performed better in falling markets. So over the long term it tends to come out the winner in terms of total returns,” Chelsea Financial’s McDermott said.
Over the last decade it has returned 173.32 per cent versus the benchmark’s 121.76 per cent and during the recent market sell-off the fund fell 3.25 per cent compared with the benchmark’s 4.56 per cent loss.
“So, it is behaving as you would expect,” he said, noting that the fund was a “strong hold” and a “good core Asian equity fund”.
Performance of fund vs benchmark YTD
Source: FE Analytics
The Adviser Centre’s Hutchison said it is a strong option for investors who are not concerned about the fund’s performance relative to the index over the short term.
“For investors who are more interested in participating in market beta, a passive fund would be more appropriate, or an active fund where the manager pays closer attention to the benchmark,” she added.
Meanwhile, Tilney’s Hollands said that although the fund lags more high-octane funds during momentum-driven markets, it remains a good option for investors.
“In view of the strong long-term track record of the team and a clear investment philosophy, we think this remains a fund and team to back for the long term, especially for investors looking for a more risk-aware approach to the region,” he said.
“Asian markets have borne the brunt of the extreme market volatility we have seen in recent days and if this is a harbinger of a choppier outlook for the months ahead I would anticipate this fund starting to outperform again.”
However, for those looking to pair it with a more “gung-ho” approach could look to Schroder Asian Alpha Plus or First State Asia Focus.
The former is a five FE Crown-rated fund run by Matthew Dobbs with a 30 per cent weighting to China (although this is still an underweight) and a 33 per cent weighting to technology stocks.
Over the last decade, the fund has experienced 118.46 per cent of the upside of the MSCI AC Asia Pacific ex Japan benchmark though it has experienced 96.41 per cent of the downside.
Conversely, Stewart Investors Asia Pacific Leaders has experienced just 61.56 per cent of the upside and 87.48 per cent of the downside.
First State Asia Focus is a newer fund, launched in 2015, and is run by Richard Jones and FE Alpha Manager Martin Lau. The fund also has high weightings to tech (22.7 per cent) and China (17 per cent) though these are still underweight the benchmark.
Performance of funds vs sector and benchmark over 1yr
Source: FE Analytics
They have returned 22.13 and 15.55 per cent respectively over the last 12 months and both outperformed the IA Asia Pacific ex Japan sector and MSCI AC Asia Pacific ex Japan benchmark in 2017.
Schroder Asian Alpha Plus has a yield of 0.89 per cent and an OCF of 0.95 per cent. First State Asia Focus has a yield of 0.76 per cent and an OCF of 1.04 per cent.