Diversify and enhance your portfolio – reasons why we like the Principal ASEAN Dynamic Fund

• ASEAN equities can play a key part in your investment portfolio as an effective diversification play, as well as a low-volatility equity play. Investors with a longer-term horizon can consider ASEAN equities for their long-term structural growth potential.
• The Principal ASEAN Dynamic Fund Class SGD seeks to achieve a stable and positive return over the medium to long-term. It is currently most heavily positioned into financials (30%) on a sectoral basis, and Indonesian (24%) and Malaysian (23%) equities on a geographical basis.
• This fund has significantly outperformed both the MSCI AC ASEAN Index and its ASEAN fund peers. While its current performance is slightly below its benchmark, this underperformance has not occurred often in history (only 15% of days since inception).
• This fund also has good downside risk management, as it has recorded a lower maximum drawdown and downside deviation compared to its peers. We therefore believe the fund has achieved one of the best risk-adjusted returns among its ASEAN fund peers.
• We prefer an active over passive investment approach in ASEAN for various reasons, and therefore recommend the Principal ASEAN Dynamic Fund Class SGD for investors seeking exposure to ASEAN equities.

In our previous article, we highlighted ASEAN equities as a potential reopening play. If you’re wondering how to invest into the ASEAN region, look no further than our recommended fund for ASEAN - Principal ASEAN Dynamic Fund Class SGD.

Related Article:
ASEAN: A Region of Reopenings and Recovery

Benefits of including ASEAN equities in your portfolio

While we believe that ASEAN equities can act as a clear reopening play, we believe they can also play a key part of your broader investment portfolio, such as significant diversification benefits for you and your investment portfolio:

1) Effective diversification play within a global portfolio

ASEAN equities offer effective diversification from major equity regions like US, China, and LATAM as their respective returns (Charts 1 and 2) show low correlations and betas. This means that ASEAN equities, on aggregate, are less impacted by downside risks that might affect these equity regions. Consequently, its inclusion in a global portfolio can lower portfolio correlation and reduce volatility. Hence, investors who are worried about the uncertain economic climates in China and US, but wish to retain some exposure into Asia, may want to consider ASEAN equities as a potential portfolio diversifier.

2) Low-volatility equity play within EM Asia

In addition, ASEAN equity returns have historically shown lesser volatility compared to their counterparts (Chart 3). We believe this lower volatility occurs due to a few structural reasons, namely:

1. ASEAN equities’ relatively lower allocations into more growth-focused tech stocks especially when compared to US equities;
2. ASEAN’s lower dependence on commodities (and their volatile prices) compared to regions like LatAm; and
3. a stable and pro-business environment within ASEAN contrasting with recent crackdowns in China.

3) Suitable for investors with a longer-term horizon for their portfolio

Investors who have a longer-term horizon for their portfolio can also consider ASEAN equities for their long-term growth potential. ASEAN as a region has a relatively young workforce numbering over 300 million workers and a growing middle-income population that could serve as a strong base for consumer demand.

Looking ahead, we see multiple positive catalysts that could drive the long-term structural growth of the ASEAN economy and equities. First, we believe the trend of manufacturing reshoring away from China can benefit ASEAN, due to the latter’s large number of workers at relatively attractive costs (Chart 4), and its geographical proximity to key Asian markets. Furthermore, intra-ASEAN financial connectivity is improving and will help the region grow as a financial hub, especially with ongoing initiatives like the ASEAN Banking Integration Framework and ASEAN Payment Policy Framework. Finally, ASEAN has a young and tech-savvy consumer market that is growing wealthier, making it one of the fastest-growing digital economies of the future – it is no surprise there are many high-growth companies of the future within ASEAN, such as Grab (NASDAQ:GRAB), Sea Ltd (NYSE:SEA), and GoTo Gojek Tokopedia.

Chart 1: ASEAN equity returns show relatively low correlations to China

Chart 2: ASEAN equities have a relatively low beta to Chinese equities

Chart 3: ASEAN equities show relatively lesser volatility compared to global counterparts

Chart 4: ASEAN continues to be cost-competitive after adjusting for productivity

A look into Principal ASEAN Dynamic Fund (SGD)

Fund details and strategy

The Principal ASEAN Dynamic Fund Class SGD fund seeks to achieve a stable and positive return over the medium to long-term through investments in the ASEAN region, regardless of market conditions. It aims to achieve a return of 9% per annum over the medium to long-term.

The fund manager’s investment philosophy looks at the early identification of change, where he attempts to identify fundamental changes and express his views by selecting the right securities before it is priced in. To do so, it applies bottom-up securities selection and top-down asset allocation. This includes examining global trends, regional themes, and quantitative screens. In addition, their bottom-up approach also includes fundamental research through industry analyses, as well as individual company research and visits.

Fund holdings

This fund currently adopts a barbell approach of cyclicals and growth, focusing on cyclical companies benefiting from the recovery and reopening, as well as stocks leveraging the structural growth themes within ASEAN. However, it does not explicitly have a sectoral or geographical theme, and also does not benchmark its asset allocation against any benchmark.

Currently, it is most heavily positioned into financials (30%), with the next largest allocations into the industrials (10%) and consumer discretionary sectors (11%) – all cyclical sectors that are well-placed to see solid earnings growth from the reopening (Chart 5). Furthermore, many of its top 10 holdings are well-placed to benefit from the economic recovery and reopening, including some direct beneficiaries (esp. tourism) like Airports of Thailand and Minor International PCL (Table 1).

Geographically speaking, compared to the MSCI AC ASEAN Index (which is not the fund’s benchmark, but our in-house barometer for ASEAN equities), this fund is largely overweight Indonesian and Malaysian equities, and this is funded by an underweight into Singapore equities. This fund also has a 6% allocation into Vietnam, unlike the MSCI AC ASEAN Index which does not include Vietnam. Investors should also note this fund treats cash as an active allocation and aims to raise more cash during periods of market downturn, and therefore they currently have a sizeable 9% of NAV into cash given ongoing market volatility (Chart 6).

Chart 5: Principal ASEAN Fund is heavily positioned into cyclical sectors

Table 1: Many holdings are in cyclical sectors, especially reopening names like Airports of Thailand

Chart 6: Fund is overweight Indonesia and Malaysia, with a 9% cash position

What we like about this fund

We favour this fund due to its track record of solid long-term performance, especially against its peers (Chart 7). Since its inception on 9 Sep 2015, it has significantly outperformed both the MSCI AC ASEAN Index (our in-house barometer for ASEAN equities) and its ASEAN fund peers. Furthermore, while its performance since inception is slightly below the benchmark of 9% per annum, we also note that this underperformance does not happen often, and the fund has actually outperformed its benchmark 85% of its days since inception. We attribute this slight underperformance versus benchmark to the recent market downturn, which has affected ASEAN equities on a broad-based level, including many other ASEAN funds.

On top of its strong long-term track record, this fund has also had better downside risk management from its inception, compared to both the MSCI AC ASEAN Index and its peers. Looking at its historical returns since inception, it has recorded a lower maximum drawdown, as well as a lower downside deviation, compared to both products (Chart 8). Therefore, we believe this fund has achieved one of the best risk-adjusted returns among the ASEAN fund products on our platform.

Finally, we also generally favour an active over passive investment approach in ASEAN, for a few reasons:

1. EM markets are generally less-researched, and the poor coverage leads to less efficient markets, which creates opportunities for active managers to pick companies with stronger fundamentals to generate positive alpha.
2. The ASEAN region contains a diverse group of countries, each with varying country risks and equity drivers. This can often result in a wide difference in returns between different markets, and therefore an active approach can take advantage of this return dispersion, and allocate their portfolio more effectively.
3. ASEAN contains many up-and-coming companies (especially in the digital economy space), and active managers have the advantage of being able to sieve out companies with stronger fundamentals and greater long-term growth potentials as potential investment targets while avoiding companies with weaker fundamentals.

Chart 7: Principal Fund has a solid long-term track record

Chart 8: Principal Fund has shown solid downside risk management

Summary

To summarise, we believe that ASEAN equities deserve a place in your portfolio, as part of your broader Asian equity allocation, due to the diversification benefits they provide, as well as their relatively lower volatility compared to other equity markets. Investors who adopt a longer-term horizon for their portfolio can also take advantage of the structural growth of the region, which should spillover into ASEAN equities themselves.

The Principal ASEAN Dynamic Fund Class SGD is an attractive investment product that has not only performed well compared to its peers but also achieved this strong performance without taking excessive risks. Coupled with our belief that an active investment approach is generally more suited for ASEAN equities, we recommend the Principal ASEAN Dynamic Fund Class SGD for investors seeking exposure to ASEAN equities.