Invest in quality and stability with this Asian fund

• Within Asian equities, we prefer a more defensive exposure as it can provide stability regardless of market conditions.

• The Fidelity Asia Pacific Dividend Fund invests in companies with sustainable moats, stable cash flows, and strong balance sheets to achieve consistent returns.

• It maintains an unconstrained, concentrated portfolio that significantly deviates from the benchmark, MSCI AC Asia Pacific ex Japan Index.

• Security selection has led to a quality and defensive tilt, reflected in its three-year beta of 0.8, indicating stability compared to the broader market.

• The fund performs well in downturns and maintains consistent returns in strong markets, resulting in significantly lower drawdowns compared to its benchmark and peers.

Asian equities have been standout performers this year, with gauges like the MSCI Asia ex Japan Index and MSCI Asia Pacific ex Japan Index both up over 10% in SGD terms. This surge can mainly be attributed to the largest Asian market, China, where stocks saw a runup from their lows, as investors were triggered by optimism around policy and had perceived valuations to be cheap.

In this article, we share our preferred investment strategy for Asia and spotlight a fund that investors may want to consider.

Investing in Asia

China constitutes a sizable weight of typically 20-30% in regional indices (Figure 1). While Chinese equities – gauged by the MSCI China Index – had a strong start this year, they have since fallen by about 10% from the peak. Despite cheap valuations, the focus has shifted back to ongoing challenges such as the property crisis and rising trade tensions with the West.

Government stimulus measures to prop up its property sector have yet to produce results. New home prices in China dropped by 4.5% year-on-year in June, marking the steepest decline since June 2015. Additionally, decisions by Washington, the European Commission, and possibly Canada to impose tariffs on Chinese electric vehicles (EVs) could hinder the sector's growth, adding to the country's economic struggles.

Figure 1: China is the largest Asian market

Meanwhile, we find Indian equities, which constitute around 20% of regional indices, unattractive. Structural challenges like high youth unemployment and twin deficits, as well as elevated valuations pose a risk of market correction.

As such, within Asia, we like a more defensive exposure as it can provide stability regardless of market conditions. A defensive strategy also suggests a tilt towards quality companies with stable earnings, low debt levels, and strong competitive positions. We recommend Fidelity Asia Pacific Dividend A-USD which typically invests in dividend-paying Asian companies with such characteristics.

Related articles:

Should you follow the rally in Asian equities?

Indian equities after election results: Are they a bargain now?

Quick Take: Why is Europe also blocking the cheap Chinese EVs?  

Fidelity Asia Pacific Dividend: Distinct strategy from benchmark

The portfolio manager of the Fidelity Asia Pacific Dividend Fund believes the key to generating consistent returns lies in investing in companies with sustainable business moats, high and stable cash flows, and strong balance sheets. This enables companies to grow their business faster and increase shareholder returns. Valuation is seen as a key source of risk, prompting the portfolio manager to invest in companies trading below their intrinsic value to reduce downside risk and enhance returns.

The result is an unconstrained and concentrated portfolio with a quality value style tilt. As of 30 June 2024, the top 10 holdings make up over 40% of the portfolio. The fund’s unconstrained approach allows its holdings to differ significantly from its comparative benchmark, the MSCI AC Asia Pacific ex Japan Index. Position sizes typically range from 1% to 5%. Notably, only two of the top 10 holdings, TSMC and Samsung, overlap with the benchmark (Table 1).

Table 1: Top 10 holdings

In view of the focus on dividend-focused total return, companies that pay little or no dividends will not feature in the portfolio. This includes areas like Chinese tech companies Tencent, Alibaba, and Meituan. Considering the heavy allocation of the tech sector within China’s equity market, this results in the fund being underweight in China (Figure 2). Similarly, the fund is underweight India due to the Indian market’s high-growth and low-yield nature. As of 30 June 2024, Fidelity Asia Pacific Dividend has 7% lower exposure to China compared to the MSCI AC Asia Pacific ex Japan Index as well as a substantial 13% lower exposure to India.

Figure 2: The fund has a lower exposure to China compared to its benchmark

Emphasis on quality

However, that is not to say that the fund has little to no exposure to Asian tech companies. One of the fund’s highest sectoral allocations is information technology, alongside other sectors like financials and consumer staples (Figure 3). The tech exposure mainly comes from holdings in chip giants TSMC and Samsung, which are quality companies with technological leadership and strong financial positions.

Figure 3: Financials and information technology are some of the largest sectors

Meanwhile, the portfolio manager is particularly optimistic on insurance and financial services within the financial sector due to their attractive growth prospects and high return on equity. Standout picks include AIA Group and Singapore Exchange (SGX). Despite HK-based AIA Group being at the receiving end of investor disdain towards China, the portfolio manager is confident in the insurer’s continued growth in new business value and healthy performance across the broader Asian market.

In the consumer staples sector, the manager favors companies with strong brands and promising growth outlooks, leading to stable, growing cash flows and progressive dividend policies. An example would be Treasury Wine Estates, an Australian-based global winemaking and distribution business.

Overall, security selection has resulted in a quality and defensive tilt for the fund which had a three-year beta of around 0.8. This low beta suggests the fund’s stability compared to the broader market.

Solid long-term performance track record

On a calendar year basis, Fidelity Asia Pacific Dividend has generally delivered relatively consistent and stable returns compared to its benchmark and Asian funds on our platform.

The fund tends to underperform in bull markets such as during the years 2019 (improving economic outlook, easing trade tensions between China and the US) and 2020 (recovery from Covid-19 shock). However, we note that the underperformance has been marginal, trailing the benchmark by just 1% and 4% respectively in 2019 and 2020 (all returns in SGD terms, unless otherwise stated).

The fund’s true strength shines during bearish markets, such as between 2021 and 2023 when Chinese stocks were rattled by multiple headwinds like crackdowns in the tech sector and an ailing economy dragged down by the property crisis. In 2021 for instance, the fund delivered returns of 10%, substantially outpacing the benchmark and peers which posted returns of -3% and 1% respectively (Figure 4).

Figure 4: Consistent performance over the last five calendar years

We attribute the fund’s resilience during downturns and its ability to capture upside in upturns to its focus on dividends and quality. By prioritising dividend-focused companies, the fund avoids most Chinese tech companies which have faced significant declines in recent years. Most importantly, dividend companies generally have stable cash flows, making them more resilient during economic downturns. Moreover, the fund’s preference for quality companies ensures that it not only holds up well during downturns but also deliver attractive returns when markets are strong. This strategy has also resulted in a significantly lower drawdown for the fund, differing by at least 10% compared to the benchmark and peers (Figure 5).

In the last five years, Fidelity Asia Pacific Dividend has posted annualised excess returns of around 2% over the MSCI AC Asia Pacific ex Japan Index (Figure 6). The fund also displayed stronger performance relative to its peers, returning annualised excess returns of 3% during this period.

Figure 5: The fund has a smaller drawdown, suggesting better risk management

Figure 6: Solid long-term performance

Final thoughts

We like the Fidelity Asia Pacific Dividend Fund for its strategic focus on dividend-paying companies with sustainable business moats, high and stable cash flows, and strong balance sheets. This gives the fund a quality value tilt with defensive characteristics, translating into resilience during downturns and its ability to capture attractive upside when markets improve. Despite its underperformance year-to-date, we note that this pattern is typical during bull markets, and that its long-term track record is still solid. In our view, the fund is a splendid choice for investors seeking relatively stable returns from the Asian equity market.