Move is reaction to uncertainty over direction of US, says Henderson TR Pacific trust manager
Michael Watt, manager of the Henderson TR Pacific Trust, has reduced his gearing from 10% to zero due to uncertainty over the direction of the US economy.
The move is designed to help Watt preserve gains made in the past 12 months
The Far East economies have performed relatively well and are looking a lot better but America is the prime mover, said Watt, who has managed the fund since it was launched back in 1987.
'Until the recovery comes through, I don't expect Asia will race away,' he added
'Asia has outperformed by a substantial amount this year and I am nervous some of that could be given up.
'Indeed, this market was hit quite hard during July. This was due to the realisation that although the results and numbers in Asia have been good, everything does depend on the US.'
The trust holds some 80 companies and is biased towards mid and small-cap positions, reflecting Watt's stockpicking investment philosophy.
Watt said outsourcing is an obvious theme in the portfolio because the Far East is benefiting from the trend of Western economies moving their production to these countries.
There are many examples of Western companies, particularly in technology, electrical goods and textiles, moving their manufacturing capacity to companies to Asia, he noted. One such example is Johnson Electric, a major holding in TR Pacific.
This company, Watt said, has contracts with all major electrical and motoring companies, including Black & Decker and Ford. Li & Fung is another example. The company makes clothing and textiles for stores such as Marks & Spencer and Gap.
In terms of geographical asset allocation, the most underweight area in the Henderson TR Pacific Trust is Hong Kong, primarily because Watt is not enthusiastic about its property sector, which makes up a large part of the Hong Kong market.
The most overweight areas are Korea and Thailand, followed by Malaysia. These are economies that have benefited from restructuring following the Asian crisis. 'Companies in these countries were hit particularly hard in the Asia crisis but have been able to reorganise and start again. They are now in very good shape,' Watt said.
Korean companies that are major holdings in the trust include the Shinsegae Department Store, representing 2.5% of the fund, and Kookmin Bank, which represents 3.5%.
Watt said Shinsegae is benefiting from a surge in the retail sector, while Kookmin Bank trades at a fraction of the valuation of similar banks in Hong Kong and Singapore.
The emphasis on Malaysia is based on the fact there are many good stocks available at low valuations simply because the market has been neglected. The opportunities are particularly prolific in the mid-cap arena, Watt said.
Other key holdings include Samsung Electronics at 3.2%, LG Electronics at 3.1%, Li & Fung at 2.9% and Shinhan Financial at 2.7%.
The portfolio is currently some £169m and the annual management fee is 0.9%. The trust is trading on a discount of 11%.
Over the past year, the share price of Henderson TR Pacific ranks it 10 out of 14 trusts in the Far East ex-Japan sector, after returning 8.7% compared to the sector average 4%.
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