MOST managers IN the faR EAST EX-JAPAN SECTOR HAVE POSTED NEGATIVE RETURNS OVER THE PAST THREE YEARS except angus tulloch at first state
In the three years to the end of January 2003, just one fund in the Far East ex-Japan sector has posted positive returns.
Only Angus Tulloch's First State Asia Pacific fund was in positive territory, with a three-year return of 0.37%, bid to bid, compared with a sector average fall of 32.18%.
The biggest fall in the sector came in the year ending 31 January 2003, with an average drop of 22.93%. In the 12-month periods to the end of January 2001 and 2002, more modest falls of 6.7% and 5.8% respectively were seen.
Richard Scott, manager of the Exeter Pacific Growth fund, outperformed his peers over the three-year period, falling just 14.95% before charges. The fund achieved its strong outperformance with one of the highest betas in the sector, at 1.13.
Scott explained this volatility was in large part a result of the unique composition of the fund. 'The fund is really a fund of investment trusts,' he said. 'It buys into an asset class that is more volatile than the one in which it is listed.'
Scott said this difference was crucial to the outperformance of the fund. 'We are able to have great diversity,' he added. 'With 25-30 managers, we have a larger number of underlying holdings.'
Scott believes being able to switch between investment trusts made his portfolio more adaptable to market conditions. 'We can move very quickly into a market or sector if we identify changes in the world economy,' he argued. 'This may take longer for those invested in individual equities.'
Scott has managed to keep volatility lower than the average investment trust by buying into funds on which he expects the discount to NAV to narrow.
The Exeter fund is managed on an asset-allocation basis, with decisions about which underlying investment trusts to buy driven by Scott's macro view of the market. For example, he got access to the Thai market by buying the Aberdeen New Thai Investment Trust managed by Hugh Young.
Exeter has sustained a steady outperformance over the three discrete years to the end of January. For the 12 months to the end of January 2003, the fund returned -16.32% against a sector average of -22.93%.
Scott said much of this was the result of a contrarian style and gave the example of his position on India.
'We were very overweight in India and benefited from the bounce in the market after it suffered as a result of the nuclear confrontation with Pakistan,' he said. 'We had a position of around 7% while the market makes up only around 1.5% of the investment universe.'
The Exeter fund posted less spectacular outperformance for the year to 31 January 2002. It made a return of 0.49%, around six percentage points up on the sector average. The fund trimmed its positions in Taiwan, Hong Kong and China, and raised its weighting in Thailand and, less beneficially, Korea.
Tulloch's top-performing First State fund has benefited from contrarian positions, most impressively in the year to the end of January 2002. His portfolio gained 18.21% while the average fund in the sector fell by 5.8% and only four posted positive returns.
He said: 'It was an interesting year in which there were effectively two markets. While tech, media and telecom sectors suffered, the rest of the economy in the region did quite well. We benefited by being very underweight in the sector.'
The First State fund has achieved its consistent outperformance through concentrating on finding companies that have reasonable valuations and steering clear of speculative stocks, according to Tulloch. He said he moved to a more defensive position slightly before the market became bearish, which hurt his performance in 1999.
However, the focus on valuation and picking companies with strong management has helped consistency, Tulloch said. 'We make 750 company visits per year, which is very important when determining the strength of a company's management,' he added.
Ensuring the quality of holdings and having a relatively low turnover has been a large factor behind the funds strong performance, with a beta of just 0.84, according to Tulloch.
While looking at individual stocks is important to Tulloch's process, political and economic factors also play a large part in determining the positioning of the fund.
'I don't think there is the clear-cut distinction between bottom-up and top-down investing some people think there is,' he said. 'When we look at an individual stock, we examine how the political and economic situation in which it operates could affect its performance.'
The fund does not track the index and this is reflected in a slightly below average R-square score of 0.89. Although it does not take stances on markets generally, Tulloch said he is very underweight Australia.
This contrasts with the Threadneedle Asia Growth fund, managed by head of desk Vanessa Donegan. The fund is overweight Australia, she said, because good opportunities have been created by the continuing strong demand for raw materials in China.
The Threadneedle fund has been changing its approach to asset management in the past 18 months, according to Donegan. She said: 'We used to look at markets on a much more country-specific basis but now we are using more thematic and stock-specific tools to decide how the fund is constituted.'
Donegan said this fits into a house-wide move that has led to an increasingly integrated approach whereby funds are more aware of where performance is coming from. 'I can see, for example, that, as of today, 84% of the fund is in stocks valued at $1.5bn or more,' she said.
Donegan added this increased visibility helps the fund alter allocation more quickly, making it more responsive to market changes.
The fund slightly outperformed the sector over the three-year period, with returns of -31.17%, bid to bid, compared with a sector average of -32.18%.
For the year to the end of January 2002, it returned -2.77%, compared with an average of -5.8%. The fund followed its benchmark quite closely, with a tracking error of 4%-6%.
The beta was relatively high at 1.11, which Donegan said could be attributed to the fact there are quite large discrepancies between country weightings. She said: 'Some funds have 30% of their holdings in Australia while others hold virtually nothing. We were very underweight Australia, although we have recently bought into it to gain exposure to resources.'
Performance fell back somewhat for the 12 months to the end of January 2003, faring slightly worse than the average fund, with a drop of 23.14%, bid to bid.
Donegan said this was the result of an overweight position in utilities that performed badly in the third quarter of 2002. The fund is overweight metal stocks, petrochemicals and shipping, where Donegan expects companies to benefit from rising freight rates.
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