By Jenne Mannion A flexible investment approach has produced the highest returns in the Far East inc...
By Jenne Mannion
A flexible investment approach has produced the highest returns in the Far East including Japan sector over the past three years.
The Pacific markets have been volatile in recent times and those fund managers who have successfully used their ability to be in defensives or strongly performing markets at the right time have produced the highest returns.
The £15.5m Dresdner RCM Oriental Assets fund returned 83.11% over the three years to March 2000, outperforming the sector average of 27.36%. Volatility was higher with an annualised standard deviation (ASD) of 30.70%, against the sector average of 26.49%.
Stuart Winchester, the fund's manager, attributes this volatility to his sometimes aggressive stance on individual holdings as well as the fact he pays no attention to benchmarks or indices.
He said: "This is an absolute return fund based on stock opportunities."
Winchester takes a purely bottom-up approach to investing and looks for stocks that represent good value in terms of their growth potential. He aims for a 20% to 30% annualised return.
The fund is able to invest in equities, bonds, convertibles and the money market. But the level of investment in equities must not be less than 50%.
Currently, 90% of the fund is invested in equities and 10% is in bonds. The bond component consists mostly of Pacific-based holdings but there are a small number of US Treasury bonds.
Geographically, 23% of the equity portion is invested in Japan with the remainder invested in the rest of Asia. This compares with 38% of equities being held in Japan last year. Winchester thinks there is more momentum in other Asian countries now. He is most positive on Hong Kong, which represents 26.21% of the fund, followed by Malaysia at 11% and South Korea at 6%.
The bottom-up approach to stock selection has resulted in 40% of the fund being invested in technology, telecom and internet-related stocks. The portfolio contains 54 holdings, although Winchester is trying to reduce this back to around 35 to 40 stocks in a bid to have a more focused portfolio.
He attributed strong performance to the investment flexibility of the fund. For example, during the 1997 Asian economic crisis he reduced his exposure to equities to 52% and invested the rest of the portfolio in other areas, predominantly fixed interest. Winchester said: "After that I felt that Japan had turned the corner and very aggressively bought into small companies, especially in the OTC market. A strong rally in this market enabled the fund to outperform last year."
The top five holdings include Patimas Computers, Culturecom, Nation Multimedia, Kerry Properties and E-Kong Group.
The £23m Legal & General Far Eastern fund returned 28.35% over the three years to March 2000, outperforming the sector average of 27.36%.
Over that period, its best performance was achieved in the most recent discrete 12-month period, when the fund returned 80.35% compared to the sector average for the same period of 74.35%. Alan Booker, the fund's manager, said the portfolio is currently 40% invested in Japan and 60% invested in other Asian countries, in line with the sector average. He has been very happy to change market weightings to generate returns.
Booker said: "Last year we recognised that while many funds were underweight in Japan there was potential in being overweight in this recovering economy after fiscal stimulus and banking reform. Therefore we moved to take an aggressive position in Japan and benefited as a result.
"Since then we have moved back to a neutral position on Japan and instead are skewed more toward Hong Kong, Singapore and Malaysia. We are also starting to shift more money into Taiwan and Korea. Taiwan for its high-end electronics and semiconductor manufacturing abilities and Korea for its corporate restructuring and economic recovery."
The portfolio contains 180 stocks, partly aiming to control volatility. The result has been that the fund has an ASD of 27.99%, slightly above the sector average of 26.49% of the fund over the three year
Booker said he is aiming to reduce the number of holdings in the unit trust by around 20 to 30 companies and eventually aims to hold around 50 stocks in Japan and 80 stocks in the rest of Asia in a bid to create a more focused portfolio.
Although there is a wide spread of holdings, including many smaller high growth companies, his bigger bets will represent 3% to 4% of the fund. He said there is no rigid style when investing the portfolio and both the top-down and bottom-up approaches are adopted.
First the team will decide on what proportion of the fund will be allocated to Japan and Asia. Then two separate teams on Japan and Asia will identify stock opportunities, taking into account macro economic considerations, currencies, individual companies' earnings growth and valuations.
Booker said: "The major change in the portfolio over the past three months has been the trimming back of the internet and tech themes and a shift toward value and old world stocks. We were overweight in the internet stocks last year which had paid off handsomely and we are now taking profits.
"While we recognise there is still much momentum to be had in terms of network systems and internet growth, we are most nervous on pure internet companies with no profits over the next few years and big cash calls likely to retain market share."
Legal & General still favours electronic component companies which are seeing strong orders and profits growth. At a country level, the fund has negligible investment in countries like Indonesia, Philippines and Australia to enable it to take bigger country bets elsewhere. These bigger bets include Hong Kong for its exposure to China, Japan for its corporate restructuring activities and Malaysia for the strong boom in the economy.
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