Full of promise despite reservations

Infrastructure spending in the Asia Pacific region has helped to attract investment in the sector. And experts agree that while short-term blips are likely, the longer-term picture is encouraging.

More than 6% of the Aggressive Adviser Fund Index was invested in funds in the Investment Management Association Asia ex Japan sector at the most recent rebalancing on November 1, 2005.

The average total return from the seven constituent funds in this sector from January 1 to April 10, 2006, was 13.7%, according to Financial Express. This compares with returns of 9.4% from the Aggressive AFI and 12.3% from the average IMA Asia Pacific ex Japan fund over the same period.

Funds in this sector can gain exposure to a wide diversity of investment opportunities, including access to the rapidly emerging economies of China and India, and the more developed markets of countries such as Australia, Singapore and Taiwan.

Two of the most popular constituent funds investing in the Asia Pacific ex Japan region are the 581m First State Asia Pacific Leaders and the 63m Newton Asian Income funds. Managed by Angus Tulloch and Alistair Thompson, First State Asia Pacific Leaders aims to achieve long-term capital growth by investing in large and mid-sized companies in the region.

Thompson says: “The Asia Pacific markets have done well in the past couple of years but we are anticipating a period of consolidation. Over the short term, we are concerned about the high risk appetite generally in the markets. Emerging market bond spreads over US treasuries are around 2% when historically they have traded at about 7%.”

He adds: “At the moment we are most concerned about the Indian markets. We hold about 5% in India but it was double that six months ago. There are some fantastic companies in India but valuations are starting to look stretched.”

Many companies in South Korea are trading well above historical valuation levels, says Thompson, but domestic consumption is picking up. Lending problems in Taiwan, including non-performing loans and credit card debt, are also factors that could negatively affect markets, he adds.

While Thompson has some short-term reservations, he is much more upbeat about ongoing prospects for the region. “The long-term outlook for Asia is exceptional,” he says.

“The fund is generally conservatively positioned by nature, but it is a little more so than usual given our short-term views. The flavour of the portfolio is defensive, with a significant portion invested in consumer-type stocks. Domestic consumption is looking buoyant in China, Hong Kong, India, Malaysia and Thailand.”

Consumer and corporate lending are both important factors. Following a massive deleveraging of balance sheets, corporate lending is slow at the moment but will pick up in the next five years, says Thompson.

“Companies are still debt-averse but we anticipate this will change over time,” he adds.

While more than a third of the fund was invested in the Greater China region at February 28, exposure to mainland China is only about 4%. Listed in Hong Kong, China Resources Enterprises is a good long-term play on the Chinese consumer, says Thompson. In Singapore, consumer stock Fraser & Neave and banking group OCBC add to the fund’s exposure to domestic economies. The fund has returned 8.5% from January 1 to April 10, according to Financial Express.

With a return of 9.6% over the same period, Jason Pidcock’s Newton Asian Income fund has grown to 63m since launch in November 2005. Australian companies made up 28% of the fund at February 28.

Pidcock says Australia can give the fund exposure to a number of different themes. “We have exposure to commodities and resources through oil and gas companies and have invested in real estate investment trusts to provide income for the fund,” he says. “We also hold a number of financials, including Australia & New Zealand Bank.”

In common with the First State fund, Pidcock says domestic consumption is the key theme of the portfolio, while regional growth and strength in currencies are also factors that can drive performance. The fund is overweight South-East Asia, partly in anticipation of strengthening currencies in the region, he says.

The fund’s biggest country overweight is Singapore, given the prospects for the domestic economy, says Pidcock. “China, Hong Kong, Korea and Malaysia are also all strong consumer plays,” he adds.

Pidcock is also wary of India and holds no investments in Indian companies. “We believe the Indian stockmarket is entering bubble territory. Valuation levels are very high,” he says.

Over the period January 1, 2005, to April 10, 2006, the Bombay Stock Exchange’s 30-stock Sensitive index increased by 76.6% in value. With large amounts of money being spent on infrastructure projects across the Asia Pacific region, the fund invests in companies that can benefit from this theme. NWS Holdings is building toll roads and ports in China and the Macquarie Korea Infrastructure fund is invested in 13 toll road projects, says Pidcock, who holds both companies in the portfolio.

The fund also holds Australian media and entertainment group Publishing and Broadcasting Limited. PBL is expanding its gaming business and is involved in developing casinos in Macau, an administrative region of China. This is a play on higher incomes in the region and more mobility and tourism, explains Pidcock.

The Adviser Fund Index Series – A Summary
The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 18 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see www.fundstrategy.co.uk/adviser_fund_index.html).