By Robert Maharajh A terrible 12 months for investors in Asian markets has wiped out the gains of...
By Robert Maharajh
A terrible 12 months for investors in Asian markets has wiped out the gains of the previous year, leaving the three-year average for funds investing in the region pretty much flat.
The three-year average return for the sector is barely in positive territory, with the arithmetic mean at just 1.69%. This breaks down as -27.08% over one year, 73.44% from March 1999 through February 2000 and -18.93% from March 1998 through February 1999.
The Singer & Friedlander Tai Pan fund, soon to be renamed the Asian Growth fund, has achieved relatively strong returns, with a total return of 10.91% over the three-year period. This breaks down as 24.29% over one year, 70.79% from March 1999 through February 2000 and -14.22% from March 1998 through February 1999.
The fund is run by Howard Thomas, who operates a 'core and peripheral' strategy. The core position accounts for roughly 70% of the portfolio and is assessed on a six to nine month view relative to local markets. The active portion involves either special country or company situations and is reviewed on a three-monthly basis. It aims for 15% absolute returns.
Thomas said: "We take the sector allocation from the core perspective and within the peripheral portion, either to increase the sector bets or look for special situations. In this segment we have no sector or benchmark restrictions. The only constraint is liquidity we will not go above 50% of the daily market volume."
At present the fund is underweight mainstream Hong Kong, Singapore and Korea, while overweighting mainstream China, Australia and Malaysia. Thomas is neutral on Taiwan. Cash holdings stand at 6%. In sectoral terms, the fund is neutral on interest rate sensitive areas and underweight technology and telecoms. It is overweight utilities.
While declining US interest rates should be an overall positive for the area, a more relevant concern for Thomas is the position of the yen. "With the yen at below 120 we believe there could be pressure on short term interest rates. This is particularly likely to affect Korea, where the won tends to follow the yen," he said.
In Taiwan, Thomas believes there could be potential for some further rate cuts but remains defensively positioned. He said: "The banking sector still suffers from asset quality problems. We are weighted in consumer food and beverages. We are also underweight semiconductor and foundry stocks.
"We still have concerns about the semiconductor cycle. Although capacity utilisation figures are increasingly factored in, we think the potential for price cuts as a result of the capacity problem have not yet been properly recognised. In addition, full-year forecasts are factoring in a strong second half, which looks increasingly unlikely, and there could be disappointments as a result of this.
"We do, however, believe there could be a short-term rally because of recent over-selling, although this is not likely to be sustained in the light of the overall earnings backdrop. However, we may use the peripheral part of the portfolio to trade some of the names we like."
A fund which does not have a three-year performance record but which is notable for achieving positive returns over one year of 3.27%, against the sector average decline of 27.08%, is the Axa Rosenberg Pacific ex-Japan Asian fund. This vehicle is run on a bottom-up stock-picking basis via a quantitative process.
Stock selection uses the company's core valuation programme, which aims to identify the cheapest stocks within each industry.
The universe of companies within the region is divided up into more than 170 business lines, in order to compare like with like. The system finds the cheapest in each business line and this is then factored in, along with an estimate of year-ahead earnings and other short-term indicators.
Next, the universe is divided into two, with one half rated as cheap and the other half as expensive. For the long-only funds, the 'under-valued' universe is used to create a portfolio which aims to maximise outperformance on the upside, while minimising deviation from the benchmark.
Jennie Patterson, director of Axa Rosenberg, said: "We aim to replicate the attributes of the benchmark, with deviation from that being justified only by outperformance potential. As a result, the fund should be relatively index-neutral, with deviations a function purely of bottom-up stock selection."
The Mellon Newton UGF Asian Growth fund has also returned impressive performance under fund manager Ezra Sun, with a three-year total return of 52.68%. This breaks down as -4.65% over one year, 89.08% from March 1999 through February 2000 and -15.31% from March 1998 through February 1999.
Sun said: "The big positive contributor to the fund's performance over the past year came from our early move into financials. At the beginning of the second half of 2000, we believed Asian financials were undervalued because of poor sentiment about loan growth, profit margins and the concerns about balance sheet strength.
"Share prices had more than discounted any bad news on these fronts and, at the same time, many of our competitors had largely ignored the positives in the sector: loan growth in the more developed markets was improving and balance sheets were getting better.
"But rather than just focus on what is known, I like to focus on what is likely to change. The move away from technology, media and telecoms to financials was the single biggest decision to have positively affected the performance of the fund."
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