By Ruth Alexander Far East ex Japan funds have returned an average of more than 20% over the ...
By Ruth Alexander
Far East ex Japan funds have returned an average of more than 20% over the three years to February 2001 but the downturn of the markets has hit them significantly recently, leading to a one year average average sector return of -12%.
Christopher Wong, manager of the Solus Eastern Enterprise fund, said the fund's above average beta of 1.2% can be attributed to the fact that the investment manager, which has been ARN since it took over from Lloyd George in October 1999, pursues a very active bottom-up stock selection approach and is not handicapped by tracking the benchmark index.
Wong, who is also managing director of ARN, said: "I achieved the alpha of 5.15% over that time period through active stock selection. Empirical evidence confirms the fund has the right mix of alpha and beta as far as its performance is concerned." This annualised alpha level compares favourably to the Far East ex Japan sector average of 0.23%. The fund's objective is to achieve long-term capital growth and stay ahead of its peers in the competitive UK unit trust universe.
It has returned 46.66% over three years to February 2001 on an offer to bid basis, against the sector mean of 23.46%. Over one year, the fund has beaten the sector mean of -12.12% with returns of -10.29%.
Wong said: "We are satisfied with the performance of the fund in what turned out to be a very challenging year. Within the constraint imposed by Ucits, ARN has been very active to preserve capital over the last year given we started to turn bearish from the beginning of 2000. We achieved that through a combination of maintaining a high level of cash as well as shifting exposure to defensive sectors."
The fund currently has an overweight position in Taiwan and the banking sector in Thailand. Wong said: "We are overweight in the Thai financial sector as we believe the worst of the banking crisis is behind us. We like the current political leadership which came into office at the end of 2000."
Wong said the setting up of an asset management corporation by the government will in time release the private sector banks to pursue new loan opportunities. He said loan spread in Thailand is currently one of the highest in the region. His favourites are banks with strong balance sheets, such as DBS Thai Danu Bank.
Due to his positive outlook on the region, Wong has moved to an underweight position in the defensive sectors such as Hong Kong utilities, a sector in which the fund maintained an overweight bias in 2000. Wong is positive on the outlook for the year 2001 because the nominal interest rates across all currencies are at their lowest since 1993.
He said: "Global equity markets have gone through a severe correction, retracing all the excesses built up by the technology, media and telecoms mania. Sentiment has reached the exact reverse of what it was at the end of 1999. With the correction, Asian markets are attractive in terms of valuation rather than growth. Growth is now our preferred strategy following the bad experience of equity investors since 2000."
The Henderson Capital Growth fund has an annualised alpha of 15.64%, combined with a low beta of 0.97%. The fund has returned 81.59% on an offer to bid basis over three years to February 2001. Over one year, the fund has also outperformed its peers, returning -5.03%.
Heather Manners, manager of the fund and a director of Hendersons focusing on Pacific and emerging markets, explained that the fund's low beta means that, although it will go up less than the index when it rises, it will also fall less. She said this is a good position to be in in a weak market.
Manners believes this process allows for pragmatism. She said, depending on market conditions, she might give more focus to, for example, country allocation or stock picking.
The fund, whose objective is to outperform the MSCI All Countries Pacific Free index, is fairly neutral towards all sectors at the moment. After what Manners described as an appalling January, where the markets bounced hard, the fund was positioned defensively.
She has now put some money back into telecoms and is particularly keen on outsourcing beneficiaries, which include technology companies in Taiwan.
Manners is not investing a great deal in technology companies Ã particularly software companies and semiconductor manufacturers.
She does not like Asian banks, either, saying they are widely held and that they have already done very well. She also noted the sector's deteriorating fundamentals: growth is dwindling and margins are being squeezed due to increased competition.
Manners favours the resources sector. She said over the past five years, mining stocks have been left out in the cold somewhat with the excitement of the technology boom. Because of this, Manners said, there has been little investment in new capacity in the sector, which means that when demand pick-up comes through, the pricing power of companies will increase because of the pressure on supplies.
She added that this situation could last a while as it takes a long time to build new mines.
Resources companies are better managed than before, according to Manners, and she added that there has also been a lot of consolidation within the sector. In particular she likes the Australian resource companies Rio and Western Mining.
Manners is positive on Asia over the next 12 months, noting it has not fallen as much as the US in recent months. Other points in Asia's favour, according to Manners, are that there is a savings build up and a current account surplus. She said the market is slowly restructuring and the management of companies is becoming more efficient.
Colonial First State Asia Pacific has returned 46.66%, over three years to February 2001 on an offer to bid basis, with an above average annualised alpha of 7.33% and a low beta of 0.93%.
Angus Tulloch, head of Colonial First State's Asia Pacific ex Japan team and manager of the portfolio, said the fund's high alpha has been realised through buying companies which have good management, a strong business franchise and a reasonable balance sheet.
In Korea, Tulloch likes banks, and in China, he favours distribution companies such as China Resources, in anticipation of the country joining the WTO. In this sense, he feels his investment approach is very country specific.
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