far east and pacific ex-japan funds felt the pressure of the technology downturn but have been cheered by increased domestic demand
Far East emerging market and Pacific ex-Japan funds have faced a volatile time over the past three years, with international markets and exposure to the technology and internet bubble causing downward pressure.
Some of the best performers have been funds of funds that have been able to diversify away much of the risk. The OAM Asian Recovery fund, which was launched during the Asian crisis in December 1998, has been one of the best in the offshore Far East ex Japan sector over the past three years to the beginning of October.
Between 1 October 1999 and October 2000, the fund was up 17.85%. From that date until 1 October 2001, it fell by 1.37%, then rose 28.36% up to 1 October 2002.
Coming out of the Asian crisis, 1999 and 2000 were good for investors in the region and valuations were cheap, said Desmond Kinch, manager of OAM Asian Recovery.
But in 2000, the markets tumbled again.
'First, there was deflation of the technology sector, which Asia is quite exposed to, and markets such as Hong Kong got caught up in the internet hype,' said Kinch.
During the first nine months of 2001, the markets continued to fall in line with others around the world to September 2001, when they bottomed. From September 2001 to March/April 2002, the region experienced a six-month recovery in line with other world markets.
The fund had a huge run from the end of September 2001 to May/June 2002, said Kinch.
Since then, the markets and the fund have dropped back again. The main reason for the fund's outperformance over the period is its resilience, believes Kinch.
The fund has maintained a disciplined value approach that has seen it through difficult patches, he said. Its fund of funds approach has also helped diversify the portfolio and reduce risk.
Kinch has allocated money to boutique managers in Asia who take a strict value approach. 'They stick to firms with strong balance sheets and little debt and considerable amounts of cash. The firms are all self-financing and do not need to go to the equity markets to raise capital for expansion,' Kinch noted.
The funds he invests in generally have limited assets under management so they can invest in small and medium-cap stocks, which is where the best opportunities are, Kinch explained.
In sector terms, the fund has benefited by targeting companies that serve the Asian consumer. Domestic consumption is rising in many parts of Asia and has huge potential. Savings rates are high and leaves room for increased spending as consumers in the region become more affluent and confident.
The Irish Life International Emerging Markets Asia Equity fund is another strong performer in the region. Between 1 October 1999 and 2 October 2000 its performance rose by 15.56%. From then to October 2001, performance fell by 12%, but to the end of September 2002, it rose again by 9.98%.
As with the OAM Asian Recovery fund, this offering has protected itself through diversification. It is a fund of funds that invests in two underlying portfolios, each with 50 to 70 positions.
In 2001 and early 2002, Asian markets decoupled from developed markets, said Hooman Kaveh, investment director of Irish Life International multi manager products.
As developed markets fell, investors saw more opportunity in Asia because of better fundamentals, he said. That period came to an end as Asian markets were affected by world markets and fell again.
One factor that has helped the fund preserve value in market down periods has been its overweight position in Australia. The defensive nature of Australian stocks, which are resource and commodity based, has helped the fund remain resilient, said Kaveh.
The Panda Sicav has also performed well relative to its peer group. From 1 October, its performance rose by 24.1%. From then to October 2001, it fell by 19.24% and rose again to 16.13% by October 2002 .
In 1999, the fund was helped by a rise in stock markets in the fourth quarter led by the technology, media and telecoms sector, said portfolio manager Choo Yoon Lai. That bubble collapsed over the rest of the period, denting the fund's performance.
Its attention shifted to China-related companies and firms likely to benefit from a growth in domestic consumption. In the fourth quarter of 2001, stock markets rallied after signs that the US economy had bottomed.
Technology stocks and traditional cyclicals such as the steel and auto sectors rose and Panda underperformed in the quarter as it has little focus on such stocks, said Yoon Lai. In 2002, South Korea gained favour with investors and many of the fund's positions have performed well. The share price of Shinsegae Department Store, for example, gained more than 50êrly in 2002, said Yoon Lai. Another of the fund's larger holdings, Esprit Holdings, enjoyed a re-rating when it bought the brand name in the US.
Chartered Asset Management's CAM-GTF fund also performed well over the past three years, despite difficulties caused by a shift in its market focus. Its performance rose by 20.47% between October 1999 and October 2000, then fell by 16.73% up to October 2001, before rising again by 24.16% to October 2002.
The fund was originally a South East Asia fund from 1999 to 2000, with 15 holdings in Singapore, Malaysia and Indonesia.
In the first quarter of 2001, its mandate was changed to include north Asia, leading to a 40% weighting in Korea. The bias was subsequently shifted to consumer staples and basic manufacturing for export.
The fund found broader, more predictable industries that aided its performance, said Colin Lee, managing director of Chartered Asset Management.
The affects of the tech bubble bursting in 2000 were felt in the fund as it was heavily weighted in that sector at the time and due to its exposure in Korea. The fund's venture capital approach also proved a danger in down markets as it created a bias towards illiquid small and medium cap stocks.
However, the approach can also lead to good returns, Lee said, adding he has reduced risk in the portfolios by knowing the companies inside out.
Regression analysis: Regression statistics can be used to compare the relationships between funds, markets or a specific benchmark index. They do not make the assumption that the variables (funds) are related as cause and effect, but permit them to be influenced by other variables (markets).
Alpha: The Alpha describes the theoretical reward obtained by one investment when the second investment has a zero return. To calculate the Alpha, the returns of each are taken and compared together to identify their relationship. This reveals relationships between investments in both bull and bear markets. When applied to portfolios, it can be considered to be the return over and above (or below) the market through portfolio strategy. Good managers have a positive Alpha.
Beta: The Beta is the amount the first fund moves when the other moves by one unit. Beta is a measure of relative volatility (absolute volatility is calculated by standard deviation).
If one fund always goes up and down by 1.5 times of the performance of the index, its Beta will be 1.5. This implies that if the return of the index is positive, then 1.5 times this positive return can be expected of the fund. If the index goes up (or down) 10%, the fund goes up (or down) 15%. Beta represents the volatility of the first investment versus the second. It is only an estimate and to be accurate there has to be a perfect correlation between the two investments.
Correlation: Correlation shows the strength of a linear relationship between two funds. A perfect correlation is when the investments behave in exactly the same manner. A perfect positive correlation is represented by 1, perfect negative correlation by -1 and no correlation with a 0. A perfect negative correlation suggests that for every 1% movement by the index we would expect to see -1% movement return on the fund and vice versa. This is an important factor when using modern portfolio theory.
Source: Standard & Poor's
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