Stewart Investors Asia Pacific Leaders & Asia Pacific Sustainability - fund update

Prevailing investor sentiment has hampered performance in recent years, however these funds could protect better than peers in more difficult markets.

This content is more than 6 months old now, please visit the news area of this site for more recent content

  1. Rob Morgan

Prevailing investor sentiment has been a set back to the performance of the Stewart Investors Asia Pacific Leaders Fund in recent years. The fund’s conservative philosophy has seen it lag during a period when certain areas the managers have been avoiding, notably the technology sector, outperformed. The team's focused long-term approach to identifying good quality, well-managed companies in the region has, as we would expect, led to outperformance of its peers during periods of market stress, 2008 and 2011 being key examples, and overall its long term performance remains impressive – though this shouldn’t be taken as an indication of future returns.

A large part of underperformance has been the lack of Chinese internet companies in the portfolio. Stocks such as Tencent and Alibaba have fallen heavily having previously performed very strongly. While fund managers David Gait and Sashi Reddy admire these businesses in terms of their growth and healthy cash flows, they have long been wary of the risks involved. Specifically, they dislike corporate structures that bar foreigners and minority shareholders from any influence. They are also sceptical that cash generated can be allocated wisely for future growth and, crucially, find their high share price valuations inconsistent with these risks.

This is very much in keeping with the philosophy of the fund, a ‘capital preservation’ mentality that aims to avoid undue risks, instead focusing on robust businesses overseen by trustworthy and longstanding ‘stewards’ – leaders or management Mr Gait, Mr Reddy and their team have got to know and trust. As such the fund’s portfolio has always differed significantly from any comparable index with many of the region’s largest companies such as Chinese banks absent. Indeed, there is no exposure to companies listed in mainland China as there are no companies that pass the managers’ thresholds on quality and corporate governance while having a sufficiently attractive valuation.

The managers explain the many primarily state-owned companies in China are not sufficiently in control of their own destiny for their liking, and while entrepreneurial companies are worth looking at they tend to fall down on quality of financial metrics such as balance sheet strength and cash generation or else valuations are too rich. They are prepared to be patient and await better opportunities. In the meantime the fund has indirect exposure to China through companies listed in Taiwan and Japan, often consumer stocks providing small and regularly consumed items or industrial stocks that are important to China’s supply chains.  

One key area is India where Mr Gait continues to find some of the highest-quality businesses. Two recent additions to the portfolio were SKF India, a ball bearing manufacturer targeting growth in electric vehicles, and 3M India which produces adhesives and items critical to areas such as wound care, filtration and road safety. Both are listed subsidiaries of multinational parent companies. Both also have a healthy balance sheet, but so far the managers have only built small positions on the basis that valuations are towards the upper end of their comfort zone.

The managers would rather compromise on valuation than quality, and are prepared to run a cash position when they feel appropriate. Currently, this is the case with 11% of the fund held in cash.

Our view

We continue to admire the Stewart Investors team’s discerning approach to investing in a region where it is easy to become over-excited about growth potential. To them, management quality and valuation discipline are the critical factors to consider for long term investment. This more conservative approach to selecting companies can help curb volatility in what is a high-risk area of investment. It also means the fund typically lags in a strong market environment, but can ultimately lead to market-beating returns for investors over the course of a market cycle.

We still rate the fund highly, but have developed a slight preference for its sister fund, Stewart Investors Asia Pacific Sustainability. The fund uses the same process, and shares the same management team and overall philosophy, but the managers will only select from their list of favourite companies the ones with the very best long-term ‘sustainability’ positioning. In this the managers consider management integrity and their attitude to shareholders as critical as well as their interaction with employees, suppliers, and customers and the impact of their activities on the local community and environment.

There is considerable overlap in terms of holdings between the two funds, though Stewart Investors Asia Pacific Sustainability has more invested in small and medium-sized companies – partly as a consequence of its much smaller fund size that allows meaningful positions to be built in these smaller enterprises. Thus although it is slightly more restrictive in terms of its sustainability mandate, it is less constrained in terms of company size than Asia Pacific Leaders.

Added to the Foundation Fundlist: Stewart Investors Asia Pacific Sustainability

A ‘sustainable’ or ‘sustainability’ investment strategy takes a long-term view aiming to generate investment returns while fulfilling certain criteria, often related to ESG (or environmental, social and governance) factors. Investments are chosen on the basis of their economic activities (what they produce or what service they deliver) and on their business conduct (how they deliver their products and services).

More broadly, sustainability means meeting the needs of the present without compromising the needs of future generations. The logic of investing this way is that good corporate citizens tend to have longevity and more chance of success. Bad practices, meanwhile, in regard to climate change or health and safety, for instance, might ultimately be harmful to a business.

Sustainable investment has been a central part of the Stewart team's ethos since veteran investor Angus Tulloch set up the Asia Pacific and Global Emerging Markets capabilities that underpin the current fund range in the 1980s. The philosophy and process is centred on the responsible stewardship of capital, and in this fund ESG factors are fully integrated into the investment process.

The managers aim to classify potential investment opportunities into one of three ‘sustainability sectors’: sustainable goods and services, responsible finance or required infrastructure. Quality is assessed through the lenses of quality of management, financials, notably the balance sheet, and the durability of its ‘franchise’. By analysing the sustainability performance and positioning of companies the team believes it can better measure less tangible elements of quality and identify hidden risks.

Direct company contact is of critical importance in the assessment of sustainability and the team undertakes a significant number of company meetings every year. A concentrated portfolio of 40 to 60 stocks are chosen, which can increase risk. They do not implement a set negative screening system, whereby certain companies or whole sectors are automatically excluded on the basis of their areas of activity, but the process naturally leads them away from any controversial companies (such as in mining or tobacco) because of the sustainability challenges they face. However, it is worth noting that because it not a negatively-screened fund, it may not be a consideration for those seeking a strict ‘ethical’ approach.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

More from author

  1. Rob Morgan

    When should you consider consolidating your pensions?

    Date: 7th Nov 2019 16:00pm

    Over the years you may have collected a variety of pension schemes, especially if you...

  2. Rob Morgan

    What could the US Presidential race mean for investors?

    Date: 7th Nov 2019 16:00pm

    A US presidential victory for Joe Biden may thaw relations between the US and China o...

  3. Rob Morgan

    Open-ended property funds - update

    Date: 7th Nov 2019 16:00pm

    Some suspended property funds are set to re-open, however others could remain closed ...

Most read articles

  1. Stewart Investors Asia Pacific Leaders & Asia Pacific Sustainability - fund update

    Open-ended property funds - update

    Date: 7th Nov 2019 16:00pm

    Some suspended property funds are set to re-open, however others could remain closed ...

  2. Stewart Investors Asia Pacific Leaders & Asia Pacific Sustainability - fund update

    August’s top and bottom performing funds

    Date: 7th Nov 2019 16:00pm

    A round up of the notable market and fund sector trends in August as large technology...

  3. Stewart Investors Asia Pacific Leaders & Asia Pacific Sustainability - fund update

    August's most widely bought and sold funds

    Date: 7th Nov 2019 16:00pm

    We reveal the funds most commonly bought and sold by customers using Charles Stanley ...

Investment involves risk. You may get back less than invested.