Stewart Investors Asia Pacific Sustainability Fund – relative resilience amid volatile markets

This socially responsible fund has been relatively well positioned during the Covid-19 pandemic and has escaped the worst of the market turbulence.

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  1. Rob Morgan

The principle of ‘sustainability’ means meeting the needs of the present without compromising the needs of future generations. The logic of investing with this in mind is that companies that treat their employees, suppliers and customers fairly, as well as having respect for the environment and local communities, have greater chance of long term success and are less likely to fall foul of scandal or controversy – and ultimately punishment from regulators or rejection by consumers.

Stewart Investors Asia Pacific Sustainability applies this ethos to Asian stock markets. The managers aim to classify potential investment opportunities into one of three ‘sustainability sectors’: sustainable goods and services, responsible finance and required infrastructure. There is also significant emphasis on the quality of a business incorporating factors such as standard management, resilience of the financial position and the durability of a company’s business model and market position.

This focus on sustainability  and quality has helped the managers, David Gait and Sashi Reddy, navigate a difficult period for Asian markets. The fund contains no exposure to the most affected sectors, including travel, leisure, airlines and oil & gas owing to a lack of ideas that meet their benchmarks. In addition, most of the companies in the fund have net cash on their balance sheets and the rest have manageable levels of debt, meaning they can withstand a sustained period of slimmed down sales. For some it also provides the opportunity to acquire other businesses at an opportune moment and invest wisely for the long term.

The managers have been impressed by flexibility, leadership and resilience shown by many of their companies during what has been an extremely challenging time. For instance, Indian IT services business Tata Consultancy, transitioned around 90% of its 450,000 employees to home working within two weeks with minimal disruption to customers. More broadly, the managers note that companies they own have remained fair to their employees and have not taken advantage of the difficult environment to lay off staff or change employment terms – which would be a red flag in terms of their sustainability principles. There have also been some examples of holdings directly benefiting wider society during the pandemic. India’s Mahindra & Mahindra has been involved in the manufacturer of emergency ventilators and Australian healthcare company CSL has donated lab space to the research of Covid-19.

Lockdowns and travel disruptions has presented some challenges to the fund’s managers in terms of meeting and engaging with company management. However, they report that the hundreds of online dialogues the team have had have been largely successful and the more challenging obstacle is the lack of clarity, through no fault of their own, that company management can provide in what remains a highly unpredictable environment. For some, such as HDFC bank in India, the priority is conserving capital (through suspending share buy backs and reviewing the dividend policy) and weathering the storm, while others such Tata Consultancy are cautiously optimistic as more customers could prioritise stable and reliable businesses in the IT market during turbulent times.

The managers make no predictions about the spread of the virus and the economic impact in the region, instead concentrating on the high-quality characteristics of the businesses they own. To this end, the market volatility has provided the opportunity to add positions in several companies they previously admired but whose share prices they felt were too expensive. For instance, power tools manufacturer Techtronic Industries, which is listed in Hong Kong, and two mainland Chinese names, Centre Testing International, which specialises in Industrial verification and certification, and Hualan Biological Engineering.

Notably absent from the fund – and other Stewart Investors Asian portfolios – are the large Chinese internet and e-commerce companies such as Baidu and Tencent. These have performed strongly over the past few years, but the managers remain concerned about the legal structure that means foreigners and minority shareholders have little influence. They prefer a prefer a ‘picks and shovels’ approach to the technology sector and are investor in chip giant Taiwan Semiconductor, as well as others in the hardware supply chain, as well as accounting software business Xero.

In terms of current market conditions, the managers report that investors are now taking a more discerning approach to the region following indiscriminate selling earlier in the year, particularly with Indian and South East Asian markets where shares in stable companies in resilient areas fell as much as economically sensitive ones.

Our view

The managers' more conservative approach to selecting companies can help curb volatility in what is a higher-risk area. It also means the fund typically lags in a particularly strong market environment led by economically sensitive areas, but it can ultimately lead to market-beating returns over the course of a market cycle. Recent performance has demonstrated this with the fund showing lower volatility than the peer group average and its benchmark, though a cash position of around 13% coming into 2020 also had stabilising effects.

It is worth noting that because it not a negatively screened fund, it may not be a consideration for those seeking a particularly strict ‘ethical’ approach. The managers do not implement a 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 controversial companies (such as in mining or tobacco) because of the sustainability challenges they face.

For more on social responsible investing, including definitions of the key terms, please refer to the dedicated section of our website.

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.

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