![Idea Of The Week: 3 Funds For The Highly Undervalued Asia Ex Japan Region! [24 Mar 17] | Open a FREE FSM account and manage all your investments conveniently in ONE place](articleFiles/webarticles/defaultThumbnail/article-img.png)
Year-to-date, Asian equity markets have generally trended higher, benefiting investors who are overweight Asia in their portfolios. As of 23 March 2017, the MSCI Asia ex Japan Index has risen by 14% (USD terms) year-to-date, with Indian and East Asian equities driving the broad-based index’s gains. Leading the East Asian equities are the Chinese equites which, as represented by the HSML 100 Index, have risen 12% (HKD terms) year-to-date, as risk appetites continue to be supported amid robust consumption data flowing out from the country and concerns of a hard-landing easing slightly. Despite the having posted strong returns year-to-date, the Asia ex Japan market continues to be significantly cheaply priced, with the MSCI Asia ex Japan Index trading at a discount compared to their estimated fair value and offer investors potential upside of 23% and 40% based on 2018 and 2019 estimated earnings!
In this “Idea of the Week” segment, we highlight three Recommended Funds and share some snippets as a way for an investor gain exposure to the Asia ex Japan region and take advantage of this significant opportunity. As seen in Table 1, the three unit trusts, which we look to highlight in this article, have not only consistently garnered laudable returns over the short and long term, but have also consistently outperformed their passively managed counterparts!
Chart 1: Fund’s Total Returns Over 5 Years
Table 1: Unit Trusts & ETFs Invested In Asia ex Japan Equities
| Type | YTD Returns (%) | 1 Year Returns (%) | 3 Year Ann. Returns (%) | 5 Year Ann. Returns (%) | ||
| Schroder Asian Growth Fund | Unit Trust | 12.0 | 26.2 | 11.1 | 9.7 | |
| HGIF Asia ex Japan Equity Smaller Companies Fund | Unit Trust | 10.8 | 30.8 | 11.6 | 16.1 | |
| First State Asian Growth Fund | Unit Trust | 6.6 | 11.9 | 10.2 | 7.3 | |
| DB X-TRACKERS MSCI EM ASIA INDEX UCITS ETF 2C HKEX:3035 | ETF | 9.8 | 22.1 | 8.6 | 5.4 | |
| ISHARES CORE MSCI AC ASIA EX JAPAN INDEX ETF HKEX:3010 | ETF | 9.4 | 21.5 | 10.0 | 7.6 | |
| ISHARES MSCI EMERGING ASIA INDEX ETF HKEX:2802 | ETF | 10.7 | 22.3 | 9.2 | 5.8 | |
| Source: Bloomberg, iFAST Compilations. Returns in SGD terms and include dividends being reinvested. Data as of 23 March 2017 |
||||||
The Cost-Conscious Investor: Schroder Asian Growth Fund
For 10 years out of 15 since the Recommended Funds List was introduced, the Schroder Asian Growth Fund has been a familiar name in our Recommended Funds List, and unsurprisingly so. The bottom-up fundamental stock picker has ranked highly across multiple time periods (both on a cumulative performance basis as well as calendar year periods) over the past five years. As can be seen in Table 1, the Schroder Asian Growth Fund consistently ranks first (excluding the performance of the HSBC fund which focuses primarily on small cap equities), posting returns of 12%, 26%, 11%, and 10% respectively for their year-to-date, 1 year, 3-year annualised and 5-year annualised total returns respectively! In terms of volatility, the fund continues to post a standard deviation lower than its peers, giving rise to comparatively strong risk-adjusted returns. As of end-February 2017, the fund posted a 12% 3-year annualised volatility level, on par with its benchmark, the MSCI Asia ex Japan Index, but outperforms with a 8% annualised total return, notably higher than its benchmark’s 5% annualised total return over the same period!
The fund’s strong and steady outperformance is a credit to the manager’s stock picking ability and bottom-up approach which it guided is the primary reason for some sector or country overweight/underweight positions, rather than the converse. Apart from offering investors strong returns and well-managed risk, the fund also possess a low expense ratio (a function of the modest annual management fee of 1.125%), making it appealing to cost-conscious investors who are also looking for a good long-term track record.
Gaining Small Cap Exposure: HGIF Asia ex Japan Equity Smaller Companies Fund
A Recommended Fund in the category of Asia ex-Japan equity (small-cap) for 2 years in a row now, the HGIF Asia ex Japan Equity Smaller Companies Fund, true to its name, invests in smaller, less-established companies listed on a major stock exchanges in the Asia ex Japan region. More specifically, the companies the fund invests in possess less than USD 2 billion in terms of market capitalisation. The fund ranks second over a five-year cumulative period in terms of returns and holds its ground against peers with both its three year maximum drawdown and downside deviation readings lower than its category peers. While its 3 year annualised volatility as of end-February 2017 has come in slightly higher at 14% compared to its benchmark’s (MSCI AC Asia ex Japan Small Cap) volatility level over the same period of 12%, its 3 year annualised total returns come in at 12%, much higher as compared its benchmark which garnered a 2% annualised total return over the same period!
In addition to posting strong returns and lower expected downside risks, the fund also expected to be fairly diversified, with around 60-90 stocks in its portfolio at any point in time. The fund manager believes that the Asian small-cap universe is inherently inefficient, providing ample opportunities for astute investors to generate alpha and typically makes investment decisions based on vigorous bottom-up fundamental analysis. This fund would no doubt appeal to the investor interested to gain a fairly diversified exposure to the Asia ex Japan small cap equities space and could definitely be considered as a complement to an investor’s Asia ex Japan large cap exposure! Interested investors may click here to find out more about the global small cap equity space.
The “Defensive” Investor: First State Asian Growth Fund
Similar to the aforementioned Schroder Asian Growth Fund, the First State Asian Growth Fund has had a long history in our Recommended Fund’s List: 9 out of 15 lists to be exact! In contrast to Schroder’s Asian fund, however, the First State Asian Growth fund adopts a relatively defensive approach in selecting stocks, which has no doubt aided it to be a resilient, strong performer amongst peer funds in the longer term, and unsurprisingly, resulted in lower volatility levels too! As of end-February 2017, the fund posts a 3-year annualised volatility of 9%, notably below the Schroder Asian Growth Fund and MSCI Asia ex Japan Index’s volatility of 12% each!
It is worth noting that given its more defensive nature, the fund tends to outperform in "down" markets and underperform in strong market upswings. As seen in Table 1, its performance has underperformed other Asian funds in the short term given its greater defensiveness in the recent market uptick. That said, its has comfortably and consistently outperformed the average Asia ex Japan unit trust over the longer term (3 year, 5 year, and 10 year periods) as well as its passive counterparts!
The fund typically emphasises on "quality" companies, and adopts a "benchmark-agnostic" approach that sees its portfolio managed based on conviction. Given the high level of active management in fund holdings, the fund returns may significantly deviate from Asia ex Japan equity benchmarks, although this has worked in the investor's favour over the long term. In conclusion, the fund definitely presents itself as a compelling option for investors seeking a more defensive exposure in the Asia ex Japan equity space!
Taking Advantage Of Significant Undervaluation!
In this “Idea Of The Week” segment, we have highlighted 3 Asia ex Japan funds which we feel are worth considering in order to gain exposure to the said market. More specifically, a cost-conscious investor may find the Schroder Asian Growth Fund of interest, while a slightly more risk-averse investor may find the First State Asian Growth Fund appealing. Lastly, an investor looking to gain exposure to small cap Asian equities as a complement to his large cap Asian equity exposure could find the HGIF Asia ex Japan Equity Smaller Companies Fund to be of interest.
While other markets may present strong expected earnings growth and dividend yields, few of the other regional markets (with the exception of the emerging markets) currently come close to offering the a valuation expansion potential that is similar to that of the Asia ex Japan region. Additionally, the Asia ex Japan market’s good potential for valuation expansion coupled with its relatively high expected earnings growth (Asian corporate earnings are expected to grow 10% in 2018 and 14% in 2019 as of 23 March 2017) and reasonable dividend yields, have seen the market presenting one of the highest potential total returns for investors with investment horizons spanning till 2018 and 2019!
All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).
iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.