Get To Know Your New Recommended Asian Equity Funds! [IOTW: 3 Aug 18]

• Different strategies outperform at different stages of the market and economic cycle
• Besides fund performance, investors should also consider their risk profile and investment horizon before deciding to invest
• Our recommended funds serve as a starting point for investors and should not be seen as a one-size-fits-all solution

With over 1,300 (and counting) funds on the platform alone, we know that choosing a product to invest in is not an easy task. Therefore, every mid-year, we release the FSM Recommended Funds Report to reduce investors’ burden by sieving out the managers that have demonstrated consistent and strong risk-adjusted returns – that’s a good half of the work done for you!

Different strategies will outperform or underperform others at different stages of the market and economic cycle, and we think that the chosen fund managers on our List will be most relevant for your portfolio. Naturally, investors should not see the report as exhaustive and all-encompassing, since differentiation in strategies, risk profiles, and investment approach can mean that product suitability will also likely differ from person to person.

In this year’s iteration, there were a total of 18 changes, of which we will explore further into two Asian Equity categories that are more popular with investors. On the back of a recovering global economy, more aggressive and growth oriented funds have seen better performance over the defensive minded ones.

Asia Ex Japan: BlackRock Asian Growth Leaders Equity Fund

Replacing First State Asian Growth Equity Fund, the BlackRock Asian Growth Leaders Equity Fund is an example of a growth oriented fund that has been able to ride on the trend of rising corporate earnings more effectively than the former, as seen in the funds’ recent performance relative to the benchmark (Chart 1).

Chart 1: A Favourable Growth Environment Is A Boon For Growth Oriented Funds

The former recommended fund differs from the current one in a sense that it is generally defensive minded, and more focused on an absolute return target rather than seeking to outperform a given benchmark. While over the past five years it has only outperformed the benchmark’s daily returns 47% of the time, compared to BlackRock’s 52% hit rate over 5 years (see Chart 2), it tends to be more resilient during market drawdowns.

Chart 2: Proportion Of Daily Benchmark Outperformance Over 5 Years

BlackRock’s investment team believes that markets tend to misprice a company’s true worth due to swinging sentiment, thus they seek to exploit market inefficiencies by investing in companies (with a mid-cap bias) that can benefit from mid to long term structural trends reshaping Asia. In the increasingly volatile market environment, mid-caps can offer a good balance between growth prospects and stability, since small cap companies can be highly volatile while larger caps generally have lesser room to grow.

In the quest for growth, however, the BlackRock Asian Growth Leaders does not overlook on valuations, as the fund seeks to invest in only relatively inexpensive or reasonably priced companies. The fund’s risk to return ratio of 1.0 (as measured by dividing annualised risk with annualised returns) is an example of team’s ability to generate returns at appropriate risk levels. Risk return ratios of 1.0 means that for every unit of risk taken, investors get rewarded for the same unit of return.

Asia Pacific Ex Japan: Threadneedle (Lux) Asia Contrarian Equity Fund

Threadneedle (Lux) Asia Contrarian Equity Fund is headed by Ng Soo Nam, an industry veteran of 22 years. The fund’s investment philosophy rests on buying high quality, sustainable growth businesses at attractive valuations. At the core of the investment team’s beliefs, is that Asian equity markets are generally priced less efficiently, driven by emotional and judgmental factors which often give rise to pessimism, creating mispriced stock opportunities in the process.

This is the type of “contrarian” philosophy the team utilise to generate alpha: by buying beaten down (but still fundamentally robust) stocks at attractive valuations that presents an advantageous point to generate future outperformance.

Overall while the strategy was able to beat the benchmark, it should be noted that the fund’s performance has also been aided by a broad based rally in growth stocks in Asia ex Japan over the past three years (see Chart 3).

Chart 3: Growth Strategies Outperforming Dividend Yielding Peers

In contrast, the dividend yield factor saw an overall weakness during the same period, which consequently did not bode well for Schroder Asian Equity Yield Fund, a fund more focused on investing in quality companies that pay good dividends (see Table 1).

Table 1: Funds’ Performance Metrics

On the upside, the fund will potentially have higher future returns when markets recover after a sell-off, as they would have entered these oversold positions at cheaper valuations.

Consequently,  the fund’s contrarian strategy of buying stocks with poor market sentiment means that investors will need to tolerate higher downside volatilities to ride out temporary mis-pricings in the market.

Nevertheless, the fund was able to generate an efficient risk to return ratio (of 0.9), which suggests that the returns generated more than compensates investors the risk undertaken.

Recommended Funds List Is Merely A Starting Point

Market cycles are akin to seasons – they come and go. Some funds may outperform in some periods, and lag behind in others. Hence the list of funds we recommended to investors annually should be seen as a reference point for investors and not a “be-all and end-all”.

It serves as a starting point for those who have yet to consider their risk profile and investment needs, which can alter the type of risk exposure and product characteristics investors require.

Surely for investors who are more conservative in nature and do not like to see high volatilities in their portfolios, our previous recommended funds remain a strong contender for inclusion in one’s portfolios.

 

The Research Team is part of iFAST Financial Pte Ltd.