The more things change, the more they stay the same. That seems to be the overarching response from experts when looking at the Stewart Investors Asia Pacific Leaders fund.
Three years ago, First State split into two, creating First State Investments and Stewart Investors, in a bid to preserve the 'boutique' culture that it had created.
This naturally led to a number of changes in both companies with manager changes being required to ensure the right people were placed in the right group.
There were reshuffles in the Stewart Investors Global Emerging Markets Leaders and Stewart Investors Latin America funds but perhaps the biggest impact to investors was the retirement of Stewart Investors Asia Pacific Leaders fund manager Angus Tulloch.
In 2015, it was announced that Tulloch – along with emerging market equities manager Jonathan Asante – would be stepping back from a number of strategies from June 2016.
At this time David Gait was added to the fund as co-manager in what was viewed as a succession-planning measure.
Therefore, while Tulloch did not officially step back from the fund until 2016, in this study we will be looking at the performance of the fund from when Gait was brought in alongside the outgoing manager. Please note, when Tulloch retired Sashi Reddy was also brought into the fund as co-manager.
Under Tulloch’s tenure between 2003 and 2016, the fund returned 431.08 per cent, beating the MSCI AC Asia Pacific ex Japan benchmark’s 225.51 per cent and the IA Asia Pacific ex Japan sector’s 214.57 per cent.
*Please note, while in the IA Specialist sector we have included the IA Asia Pacific ex Japan sector as a more accurate representation of the fund’s peers.
Performance of fund vs sector and benchmark under Tulloch
Source: FE Analytics
“Tulloch had an amazing reputation and therefore it was always going to be a tough one for someone to step into his shoes,” Adrian Lowcock, head of personal investing at Willis Owen said.
“Gait also has a lot of experience and has been with the team since 1997. He had built up a good record on the Asia sustainability [Stewart Investors Asia Pacific Sustainability] fund.”
Indeed, during his time on the fund – which he ran alongside Tulloch – Stewart Investors Asia Pacific Sustainability returned 21.68 per cent, a top quartile performance in the IA Asia Pacific ex Japan sector.
Due to his longstanding relationship with Tulloch, as well as the team-based approach employed in the firm, not much changed when the fund was handed over.
“[The fund] is underpinned by a strong emphasis on the importance of capital preservation, a focus on quality companies with high standards of corporate governance and an approach which is benchmark unconstrained,” Jason Hollands, managing director at Tilney Group, noted.
“That has remained consistent since the baton was passed on from Tulloch to Gait and so it really has been a case of ‘more of the same’.”
Ben Yearsley, director at Shore Financial Planning, added that the fund can be expected to underperform in strongly rising markets, such as in 2016 and 2017, but should outperform in more challenging markets (like 2018).
Performance of fund relative to IA Asia Pacific ex Japan sector over 3yrs
Source: FE Analytics
“Since the start of the year markets have been more difficult therefore it is no surprise to see Asia-Pacific leaders outperform the sector,” he said.
The fund focuses on quality, sustainable businesses, often missing out on fads, fashion or more speculative companies.
It should be somewhat unsurprising therefore that it does not have mainland Chinese exposure – and it has instead been heavily weighted to Indian companies (30.4 per cent).
The fund has also not held highly fashionable Chinese internet stocks, which has meant that it has underperformed when the likes of Tencent, Alibaba and Baidu have been flying.
Overall, during Gait’s tenure Tilney’s Hollands said the relative performance compared to other Asia ex Japan funds isn’t down to the change in lead management but rather the consistency of pursuing a more cautious approach that “eschews speculative stocks”.
However, Willis Owen’s Lowcock said that Gait has changed a couple of aspects to the fund that were not in place under Tulloch.
“[He] introduced some sustainability processes, although this builds on the house style of looking for companies with predictable earnings growth with the emphasis on long term and low turnover,” he said.
Despite the underperformance he said that he would still recommend the fund as the process has not materially changed since Gait who is still well supported by a good team.
Tilney’s Hollands agreed, noting that it is “remains an excellent, core choice for a long-term holding”.
But Shore Capital Yearsley said there are better options out there. While he said that he has “nothing against the fund” and would “happily hold the Stewart fund for the long term”, he uses the First State Asia Focus fund managed by FE Alpha Manager Martin Lau and Richard Jones.
The fund has been a top quartile performer over three years and is ahead of both the IA Asia Pacific ex Japan and MSCI AC Asia Pacific ex Japan since inception.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The fund again focuses on high quality growth companies and is typically low turnover. As such, it has had high weightings to technology and consumer staples for some time.
It is also overweight India – as well as Hong Kong and Singapore – while underweight China, Taiwan and Korea.
The fund can invest up to 20 per cent in non-benchmark companies and currently has a 4.9 per cent weighting to Japan and 4.2 per cent holding in the US. It has a yield of 0.78 per cent and a clean ongoing charges figure (OCF) of 0.9 per cent.
However, Yearsley said that given its focus on quality and its defensive nature “you would probably pair it with something more racy that taps into smaller, niche more growth focused businesses”.
“Something properly racy would be Matthews China smaller companies, but this might be a step too far. Schroder’s Asian Alpha Plus under Matthew Dobbs is a more sensible one I’d put it with.”