e-fundresearch: "Which are the most important factors currently when you assess Asia ex Japan equities?"
Caroline Keen, alternate manager, "Newton Asian Income GBP Inc" (ISIN: GB00B0MY6Z69) (14.02.2012): "It is important to consider both global and Asian factors when considering Asian equities. Factors external to the region have had considerable impact on markets in the region in recent years as correlation between markets has been relatively high with investors moving between “risk on” and “risk off” periods in unison. We believe the two most important external factors are the ongoing crisis in Europe and the US recovery. In recent months investors have become slightly more comfortable with the situation in Europe, however, we do not believe that the recent long term deficit reduction plan in the EU is sufficient to solve the deep rooted problems of over indebtedness and lack of competitiveness, and therefore expect these issues to dampen markets for some time. It also remains to be seen how a full default, or exit from the Euro, by Greece or anyone else will be taken by markets.
Recent data from the US has been more positive, which is encouraging for exports from Asia as well as for global economic growth. However, this improvement is still minor, which is highlighted by the fact that the Fed has committed to interest rates near 0% until 2014. Continued loose monetary policy in the US is beneficial for Asia for a number of reasons, not least the fact that it will mean a weaker US$ than otherwise, which traditionally is positive for emerging market equities.
The other external issue that has raised its head again recently is tensions in the Middle East. If Iran retaliates to sanctions imposed upon it by the US and EU either by closing the Straits of Hormuz as threatened or in some other way, it could cause the oil price to spike dramatically. This would be destabilising for world growth, although we do not see this as a base case.
The most important factor internal to the region is the outlook for China. Following the massive stimulus in 2009 and 2010, China has less ability to manufacture growth than previously. Nonetheless, policymakers still have considerable tools at their disposal and have, to date, had remarkable influence in the path of the economy. We expect the authorities to loosen selectively when necessary such that growth in 2012 will be lower, but not drastically so. Further out we are less positive due to structural concerns of over investment, lack of sustainable profitability and a dysfunctional banking market. These problems will start to manifest more materially when growth slows, more so than the market is expecting.
A lot of the rest of the region relies on Chinese growth. Australia is certainly in this camp. However, we are more constructive on Australia than most. Government debt to GDP is low, the current account deficit is shrinking, demographics are supportive and the domestic economy is relatively resilient (inflation under control and room to cut rates). On top of this, we think the boom that LNG exports will create from 2014 onwards is underestimated, and will also lead to a strong AUD for longer.
Within ASEAN there are pockets of interest which can disconnect from the wider region. Indonesia, the 3rd most populous country in the world, will be one of the best performing economies over the next decade, but has perhaps run a little to hard recently. The Philippines too are very attractive. Malaysia and Singapore offer a more developed alternative, and accordingly are more linked in to the global economy. In time we think Burma could be an exciting country, but this is many years away."
David Gait, "First State Asia Pacific Sustainability A GBP Acc" (ISIN: GB00B0TY6S22); Angus Tulloch, "First State Asia Pacific A GBP Acc" (ISIN: GB0030183890) & "Skandia Pacific Equity A USD" (ISIN: IE0005264431); Angus Tulloch/ Alistair Thompson, "First State Asia Pacific Leaders A GBP Acc" (ISIN: GB0033874214) (16.02.2012): "While company valuations in the Asia ex Japan region have come down we do in most instances not feel that the risks are sufficiently offset by the potential rewards. Our positioning remains defensive and we prefer steady cash-generating companies that have proved that they can weather economic turbulence. We are worried about the significant debt problem in the West, which remains largely unresolved, and thus avoid Asian companies that are heavily dependent on exports there, focusing instead on businesses geared towards growing domestic demand in the region."
Manish Modi, Portfolio Manager, "UBS (Lux) Eq Fd - Asia Opportunity (USD) P-acc" (ISIN: LU0067411347) (13.02.2012): "We are focused on stock selection. We favour companies with differentiated competitive strengths which can deliver robust returns on capital over the cycle. We look for companies that are attractively valued from a mid-long term perspective. Our continuous endeavour is to find stocks that are mis-priced in the market."
e-fundresearch: "Which are the most important elements in your investment process?"
Caroline Keen, alternate manager, "Newton Asian Income GBP Inc" (ISIN: GB00B0MY6Z69) (14.02.2012): "First and foremost it is the people who are the most important aspect of our investment process. Not only do we have first class access to information at Newton, but we also have a vast amount of accumulated knowledge collectively, thanks to the years of experience of the team. As well as the four of us on the Asia desk, we have a vast number of equity analysts who specialise in their sector, on a global basis. This gives them both a global perspective, and specialised knowledge on the stocks they cover. This means we have a first class ability to analyse the information available to us, and therefore ensure that the best investment ideas make it into the portfolio. In addition, at Newton we invest thematically. Our investment themes represent the changes we see occurring in the world, and focus our minds towards the most interesting and relevant investment ideas."
David Gait, "First State Asia Pacific Sustainability A GBP Acc" (ISIN: GB00B0TY6S22) (16.02.2012): "As bottom up investors we try to identify companies that exhibit characteristics such as strong cash-flows, low leverage and growing dividend yields. We also place significant emphasis on less easily quantifiable factors such as the integrity of management and degree of alignment with minority investors. Critically, our analysts spend as much time thinking about what could go wrong as what could go right. While we are not absolute return investors in the strict sense of the term, we often refer to our style as investing with an absolute return mindset."
Angus Tulloch, "First State Asia Pacific A GBP Acc" (ISIN: GB0030183890) & "Skandia Pacific Equity A USD" (ISIN: IE0005264431); Angus Tulloch/ Alistair Thompson, "First State Asia Pacific Leaders A GBP Acc" (ISIN: GB0033874214) (16.02.2012): "We are long-term investors. We strive to make investment decisions with a three to five year time horizon. As a result many sustainability issues become investment issues for us. In contrast, it is very difficult for investors who are focused on next quarter’s profits and realising a quick paper trading gain to pay attention to SRI issues."
Manish Modi, Portfolio Manager, "UBS (Lux) Eq Fd - Asia Opportunity (USD) P-acc" (ISIN: LU0067411347) (13.02.2012): "At the core of our investment process is the continuous effort to determine intrinsic value. We emphasise long-term fundamental research performed by our internal investment specialists. Bottom-up stock research dominates our investment approach. Research analysts conduct extensive fundamental research visiting not only the companies that they are researching but also competitors, suppliers and non-conventional sources of information (industry executives, consultants, academics). Using this information, analysts build and maintain forward-looking models for each company with standardised inputs to our Global Equity Valuation System (GEVS). Future cash flows are then forecast for each company and discounted to the present. This estimate of future free cash flow is then compared with the current price to ascertain the size of the valuation anomaly. This valuation anomaly is expressed as an expected return (alpha). In addition to quantitative inputs, our analysts also assess the company’s management, strategy and position within its industry.
In making final portfolio decisions, we employ the judgement of our senior investment professionals in order to assess the significance and sustainability of the identified departures from fair value. It is the role of the portfolio manager at the portfolio construction stage to take the analysts´ ideas and insights and construct a portfolio to best meet the client objectives. Risk is integral to the process and all portfolios are monitored to ensure we are not taking uncompensated risk."
e-fundresearch: "Which regions and/or sectors are currently overweight or underweight in Asia ex Japan equity funds? What are the reasons for it?"
Caroline Keen, alternate manager, "Newton Asian Income GBP Inc" (ISIN: GB00B0MY6Z69) (14.02.2012): "The most significant overweight position is Singapore. Whilst only a small part of the index, Singapore has some world class companies with exposure to the wider region. On top of that the currency will be a long term beneficiary of growth in the region and the problems in the developed world.
The biggest underweights are India and South Korea. Whilst India is an attractive growth market, companies do not currently pay sufficient dividends to meet the fund’s criteria. We foresee this changing in the years ahead. South Korea we dislike as a market. The demographics are unattractive and company management are uninspiring and rarely have shareholder interest at heart, highlighted by low payout ratios. Furthermore, the downside for the economy if reunification with North Korea were to occur is massively understated. Whilst we do not foresee immediate reunification, we anticipate more instability as the young and inexperienced Kim Jong Un takes control of North Korea after the death of his father and former leader, Kim Jong Il.
We are overweight Australia for the reasons touched on above, as well as the fact that it is a good hunting ground for income with a long track record of disciplined capital management.
On a sector view, the most significant overweights are in Telecoms, Industrial and Oil and Gas. The telecoms sector provides very attractive, growing yields thanks to strong cash flows. Within Asia, telecoms companies often operate in monopolistic positions making the threat of competition lower than other industries. We are constructive on the long term outlook for the energy industry, and believe that gas will become increasingly important to the global energy story, and the portfolio is positioned accordingly. Our exposure to the industrial sector is diverse, but we particularly like transport infrastructure stocks with strong, recurring cash flows.
We are underweight basic materials, largely because of the lack of significant yields in the sector. Whilst we are very positive on some regional banks in Thailand and Singapore, as well as a number of Real Estate Investment Trusts, we are underweight financials due to a zero weighting in Chinese banks which make up a large part of the index. We see Chinese banks as arms of the government and the lack of visibility makes them uninvestable in our opinion."
David Gait, "First State Asia Pacific Sustainability A GBP Acc" (ISIN: GB00B0TY6S22); Angus Tulloch, "First State Asia Pacific A GBP Acc" (ISIN: GB0030183890) & "Skandia Pacific Equity A USD" (ISIN: IE0005264431); Angus Tulloch/ Alistair Thompson, "First State Asia Pacific Leaders A GBP Acc" (ISIN: GB0033874214) (16.02.2012): "We are bottom-up stock pickers and do not believe in investing relative to benchmarks and thus do not pay attention to index weights when constructing our portfolios. Typically we have a preference for defensive companies in the Consumer Staples, Telecoms and Utility sectors while we are less interested in cyclical areas such as Energy and Materials. We are still sceptical about the prospects for many financial companies in the region, aside from a number of quality banks in Singapore where the regulatory regime is more robust. Geographically speaking, we maintain relatively high exposures in Singapore and Hong Kong while we are less heavily invested in China and India."
Manish Modi, Portfolio Manager, "UBS (Lux) Eq Fd - Asia Opportunity (USD) P-acc" (ISIN: LU0067411347) (13.02.2012): "Our sector and country positions are primarily driven by bottom up stock picks.
The portfolio remains focused on stock selection. Overall, we are positive on domestic demand beneficiaries (financials, consumer sectors) which are relatively more resilient given lower earnings risk and structural growth drivers.
- Consumption, specifically in Asia, is a major structural theme. Rising penetration from low levels is driven by favourable demographics, rising disposable incomes and low leverage.
- Unlike European banks which are vulnerable to further stress in their sovereign debt markets, Asian banks are well positioned to ride out the turmoil in Europe. This is especially true for banks in Emerging Asia where there remain ample domestic growth opportunities and domestic interest rates offer reasonable yields.
On the other hand, we are underweight global cyclical sectors such as industrials and materials, as well as countries that could be more vulnerable to a global slowdown such as Taiwan and Korea. Malaysia is another key underweight due to the lack of attractive bottom up opportunities. Malaysia is largely dependent on exports and commodities, which could face a slowdown in a weakening global environment."
e-fundresearch: "Please comment on the performance and risk parameters of your fund in the current year as well as over the past 3 and 5 years."
Caroline Keen, alternate manager, "Newton Asian Income GBP Inc" (ISIN: GB00B0MY6Z69) (14.02.2012): "The Newton Asian Income fund has an extremely strong performance track record, being top quartile in one year, three years and five years time periods. Given the income bias of the fund and its beta of less than one, we do expect it to outperform when markets are weak. Indeed, historically it has outperformed every quarter when markets have fallen. However, it is also able to out-perform when markets are rising, as was the case in 2010. We do look to achieve the best total return possible in all market environments, while adhering to our stated objective that the fund as a whole must yield 35% above the index. This means we target both income and growth, and since inception, roughly 50% of the fund’s return has come from income and 50% from capital growth. This allows us to achieve returns with lower volatility, as we cushion the downside but remain exposed to the upside. 2011 was an exceptional year, with the fund being flat in absolute terms, while the index was down 15%. This outperformance was led by stock selection, a zero weighting in India and overweight in defensive sectors such as telecoms."
David Gait, "First State Asia Pacific Sustainability A GBP Acc" (ISIN: GB00B0TY6S22); Angus Tulloch, "First State Asia Pacific A GBP Acc" (ISIN: GB0030183890) & "Skandia Pacific Equity A USD" (ISIN: IE0005264431); Angus Tulloch/ Alistair Thompson, "First State Asia Pacific Leaders A GBP Acc" (ISIN: GB0033874214) (16.02.2012): "Up to the end of January 2012 the Asia Pacific Leaders Fund has outperformed its benchmark and peer group over 1 and 5 years, while underperforming on a 3 year view.
Up to the end of January 2012 the Asia Pacific Sustainability Fund has outperformed its benchmark and peer group over 1 and 5 yearr while underperforming its benchmark over 3 years."
Manish Modi, Portfolio Manager, "UBS (Lux) Eq Fd - Asia Opportunity (USD) P-acc" (ISIN: LU0067411347) (13.02.2012): "We can´t comment on 3 and 5 years, since this strategy was incepted in July 2010.
Nevertheless, the strategy has outperformed ~5% (gross of fees) over the past year and ~2.2% (gross of fees) since inception. (Note: periods to 31 Jan 2012).
Outperformance over the past year had been mainly driven by positive stock selection, especially in financials and consumer discretionary sectors. The overweight in consumer staples also added value. On a country level, stock selection was most positive in Singapore. Country allocation effect was positive mainly due to the overweights in Indonesia and Thailand.
The risk in terms of tracking error is and has been 4-5%."
e-fundresearch: "Where do you see opportunities and where do you see risks?"
Caroline Keen, alternate manager, "Newton Asian Income GBP Inc" (ISIN: GB00B0MY6Z69) (14.02.2012): "As mentioned above, the long term opportunities in Asia are still intact. Demographics and urbanisation trends are still broadly positive for the region as a whole. Rising middle classes and disposable incomes are also very positive, giving more power to consumers. Governments, corporates and consumers are in decent financial health – considerably more so than the west. On top of this, authorities have much more scope to use monetary and fiscal policy in order to ease conditions in the shorter term. All of this results in superior GDP growth in Asia than many developed nations.
However, significant risks remain. There are political and economic headwinds in Europe and USA, as covered above. Energy security is an ever increasing issue for all countries, and has raised its head again in recent years – a significant oil price shock is damaging for emerging markets. Finally, there is a risk that China slows more than expected, which would probably lead to many other problems materialising."
David Gait, "First State Asia Pacific Sustainability A GBP Acc" (ISIN: GB00B0TY6S22) (16.02.2012): "We still see value in companies exposed to domestic demand in Asia, but steer clear of businesses that are heavily geared or where interests are not clearly aligned with minority shareholders. The dividend culture across Asia is maturing and we are attracted by cash-generative companies that share the rewards of sustainable success with minority shareholders through a progressive dividend policy. Key risks emanate from possible contagion from the sovereign debt crisis in the Eurozone, with European banks already reining in their previously significant lending activities in Asia to bolster capital buffers back home.
In China, lower input costs should help inflation to come down, but we fear high expectations on the wage front in the face of depressed external demand, plus a change in leadership, could lead to growing social discontent as well as margin pressure."
Angus Tulloch, "First State Asia Pacific A GBP Acc" (ISIN: GB0030183890) & "Skandia Pacific Equity A USD" (ISIN: IE0005264431); Angus Tulloch/ Alistair Thompson, "First State Asia Pacific Leaders A GBP Acc" (ISIN: GB0033874214) (16.02.2012): "We remain concerned about the global backdrop. It seems unlikely that we have seen the worst in terms of the political and economic fall-out from Western economies. We are particularly concerned about rising inequality and what that means for social unrest, in the face of slowing economic growth. Meanwhile, economic growth in Asia and Emerging Markets is starting to slow with countries such as Taiwan and Korea have also experienced significant slowdowns in economic activity."
Manish Modi, Portfolio Manager, "UBS (Lux) Eq Fd - Asia Opportunity (USD) P-acc" (ISIN: LU0067411347) (13.02.2012): "Despite incrementally positive data from U.S. in recent weeks, developments in Eurozone remain an overhang as European leaders struggle to manage the region’s debt crisis. The drag from economic uncertainty is likely to linger, given few signs that policymakers are able to effectively address sovereign debt and growth challenges. Asian economies will not be spared as the region’s growth remains closely linked to the global manufacturing cycle.
Growth momentum in Asia has fallen, but this has been accompanied by receding inflation pressures. Lower inflation helps remove some headwinds and should allow modest scope for policy easing in 2012. With regards to China, we believe that the nature of its growth would change towards more consumption driven and the rate of growth would be slower compared to its previous 5-7 years.
Asian equities valuations are trading well below historical averages, although still have some potential downside to financial crisis valuation levels. The silver lining for Asian equities is that many of the domestic policy headwinds are likely to recede. While a risk-off trade in the face of further macro uncertainties could drive capital flows out of asset classes that are perceived to be risky e.g. Equities including Asian Equities, Asia’s stronger fundamentals should provide some support. If the global macro situation were to improve, this could provide an impetus for Asian equities.
Fundamentally, the Asian region offers better growth prospects with structural drivers still intact, specifically: demographics, urbanization, rising productivity and consumption growth. Asia ex Japan economies also benefit from relatively sound balance sheets enjoying generally low debt at government, corporate and household levels."
Performance Daten per 06.02.2012: