By Michèle Harrison Analysis of the Asia ex Japan offshore fund sector shows that although the three...
By Michèle Harrison
Analysis of the Asia ex Japan offshore fund sector shows that although the three-year average return is negative, a number of funds have nevertheless managed to generate significant positive returns.
The range of returns has been large, with the differential between the top and the bottom performing funds exceeding 200%. The best performer rose by 146% while the worst fell by 97%.
Of the 132 funds in the Standard & Poor's Micropal sector, the arithmetic mean return over three years to the end of April 2000 is -2.49%.
The average one-year return is 28.21%, the average return from May 1998 to April 1999 is 12.23%, and the average return from May 1997 to April 1998 is -32.93%.
The arithmetic mean of the funds in the sector shows an average annualised alpha of 3.53%, a beta of 0.95, a correlation co-efficient of 0.88, an R-squared of 0.81%, an annualised standard deviation of 34.8% and an annualised mean return of 4.12%.
The best performing fund over the three-year period is the Fleming FFF Asian Opportunities fund, which has generated a cumulative return of 146.08% over the past three years.
The yearly returns are -4.16% from May 1997 to April 1998, 25.29% from May 1998 to April 1999 and 104.94% May 1998 to April 2000.
The annualised alpha is 41.58%, the beta 0.74, the correlation co-efficient 0.73, the R-squared 0.53% and the annualised standard deviation 33.41%.
Roger Ellis has managed the portfolio since January 1996 and, with almost $800m under management, it has now become one of the largest funds in the sector. Outperformance was largely achieved in the last 12 months when the fund rose 62.58% against an average of 22.31% for the sector.
This was due to Ellis successfully positioning the fund to take advantage of the economic growth recovery in Asia in 1999, especially in the export and technology sectors.
Ellis is based in Hong Kong where he heads the Pacific regional team which consists of 20 managers, most of whom are country specialists.
The fund's approach is to select a portfolio of stocks that have passed a ranking process based on growth and valuation criteria.
In addition, the managers will visit all the companies in the portfolio on a regular basis to meet the management and ensure that expectations are likely to be realised. Last year the team made more than 1,000 company visits.
Although this is a bottom-up driven fund where the emphasis is on good stockpicking, Ellis is also influenced by investment themes and macro considerations, including political developments.
He said that the portfolio's exposure to new economy stocks, while it greatly benefiting the fund in 1999, has had a more negative impact recently.
He said: "The volatility in markets both in Asia and elsewhere is likely to remain in the short-term, a phenomenon that investors will have to accommodate as US markets have for the last two years. As such, we will continue with our stockpicking approach."
Ellis sees weaknesses in the market as buying opportunities. The fund's largest allocations are Taiwan at 29.7%, Hong Kong at 29.5% and Korea ay 24.9%. Although the fund holds as many as 70 stocks, it is run in a relatively concentrated fashion with 46% held in the top 10 positions.
Another portfolio that has performed well is the Henderson Horizon Pacific fund, managed by Kirsteen Morrison in Singapore. The Henderson Pacific team comprises a total of nine people.
The fund invests primarily in large companies in Far Eastern countries ex-Japan and starts with a top-down approach.
Morrison said: "This region is a complex and dynamic environment where extensive macroeconomic research is required and the approach to country allocation is therefore top-down.
"The major political and economic forces that drive the individual economic markets are evaluated and the impact of global activity on the region as a whole is considered.
"This, together with detailed trend and theme analysis, creates a broad framework for deciding the best overall country and sector weightings."
In selecting stocks, the fund looks for good management and attractive valuations.
The Henderson Pacific team also averages about 200 company visits a year.
The emphasis is on identifying companies with strong competitive positioning, good quality management and the ability and intention to enhance returns.
Regarding recent policy, Morrison said: "The technology weighting was reduced while the old economy weighting was increased.
"Given the changing global outlook and the reduced risk appetite of investors, the technology weighting was further reduced.
"This involved selling some quality technology stocks that were not insulated from the technology reversal. The fund increased its exposure to the defensive sector."
"The Asian recovery was aided by the strong demand for technology hardware which boosted the export performance across the region.
"The economies have recovered from the crisis and the rate of growth is likely to slow in 2001.
"We remain positive about the long-term outlook but anticipate continued volatility until the outlook for the US economy becomes clearer."
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