Stewart Investors Asia Pacific Leaders: focus on quality pays off in Asia turmoil

We continue to admire the Stewart Investors team’s discerning approach, which is helping weather current volatility.

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  1. Rob Morgan

Prevailing investor sentiment was a set back to the performance of the Stewart Investors Asia Pacific Leaders Fund in 2016 and 2017. The fund’s conservative philosophy meant it lagged as economically-sensitive areas, notably the technology sector, generally outperformed more defensive ones. However, 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 the recent market sell off with the fund suffering significantly less than the sector average.

A large part of this 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 manager David Gait admires these businesses in terms of their growth and healthy cash flows, he has always been wary of the risks involved. Specifically, he dislikes corporate structures that bar foreigners and minority shareholders from any influence. He is also sceptical that cash generated can be allocated wisely for future growth and, crucially, finds 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 and his 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.

This willingness to be different has, over the longer term, seen the fund outperform. During weaker periods in the past it has also tended to hold up better than peers in periods of market stress, 2008 and 2011 being key examples. 

The fund’s cash position has gradually been rising throughout the year from around 5% in January to nearly 15% currently, and this has been a further factor in helping preserve investors’ capital.  This reflected the team’s wariness of the valuations among Asian stocks, but now the managers are starting to take certain opportunities presented by the heavy share price falls. They aren’t quite willing to turn wholly positive yet as higher global interest rates could continue to put pressure on companies, and some countries, in the region, but believe they are well placed to weather any storm and to deploy cash during any further periods of weakness.

One key area is India where Mr Gait continues to find some of the highest-quality businesses available in the region. The country accounts for nearly a third of the portfolio presently, and the fund has benefitted in particular from positive performance by Indian IT companies Tata Consultancy Services and Tech Mahindra which both performed well on good results. However, he often finds it a struggle to identify Indian businesses at valuations acceptable to their disciplined approach.

Kansai Nerolac represented one such frustration. In his view it is one of the strongest franchises in Asia but shares are highly prized. The team found an alternative, better-value way to invest, through the parent company listed in Japan, which offers an opportunity to benefit from growing paint consumption more broadly across Asia as well as in India itself. Short-term concerns around high oil prices, the key raw material in paint, provided the opportunity they needed to invest.

Elsewhere, the team have been taking advantage of market stress to buy positions in quality companies in markets such as Thailand, Indonesia and the Philippines at more attractive valuation levels. Another recent addition was Chroma ATE, a small Taiwanese business producing testers and measurement equipment which are technically difficult to replicate and essential for quality assurance purposes.

A number of the recent sales reflect lingering concerns about an impending economic downturn. South Korea’s Shinhan Financia, for instance, because of concerns about the availability of credit and high house prices. Long term holding Li & Fung along with Yue Yuen Industrial, both listed in Hong Kong and in the consumer discretionary sector, were also disposed of as the managers lost confidence in the controlling families’ ability to improve business in a tough environment of rising global interest rates. .

As usual the portfolio is concentrated with only 42 holdings at present, and the top ten accounting for over 40% of the fund. A concentrated portfolio can add to the level of risk because each position has a more significant impact on returns – although the relatively conservative approach in terms of stock selection has historically resulted in lower volatility than the average fund in the sector. Nonetheless, it should be noted that the emerging markets the fund invests in may not provide the same level of investor protection as developed markets, and may involve higher risk than investing in developed markets, including a higher than normal risk of changes in currency exchange rates.

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. The fund remains part of our Foundation Fundlist of preferred investments across the major sectors.

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

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