Choosing growth of value stocks depending on liquity conitions will the help fund cope with volatility in Asian markets
Despite poor returns last year, the Invesco Asian Equity fund is better positioned to cope with volatile times ahead, according to Stuart Parks, the fund's manager since 1998.
He says: "Last year the portfolio was hit by poor returns because of stock selection in the consumer discretionary sector and an underweight position in the outperforming energy sector as oil and gas prices rose strongly. The fund also had a cash weighting in a rising market, which negatively impacted overall performance."
However, Parks anticipates a stronger 2006, after positioning the fund more defensively on the back of market volatility.
"I choose stocks that can either be growth or value depending on liquidity conditions," he says. "Therefore, when liquidity conditions are favourable, the portfolio is likely to have a greater exposure to growth stocks.
"But when liquidity conditions are negative, the emphasis should shift towards capital preservation with more focus on valuation, balance sheet strength, earnings visibility, and a company's ability to generate free cash."
It is this strategy that should help the fund cope with further volatility in the Asia markets, Parks asserts.
He explains: "Although the long-term outlook for Asian economies and markets is positive, the region still faces a number of challenges. Higher raw material prices and rising global interest rates with the Federal Reserve Bank suggesting it could increase interest rates once again from 5.25% is still making investors nervous."
Despite this, Parks says corporate finances are strong with companies willing to invest in the infrastructure needed.
Parks adds: "This will keep Asia growth rates at higher levels than those of the developed world."
In Hong Kong, Parks favours real estate developer Cheung Kong Holdings, which is likely to benefit from an increase in investment in infrastructure as low interest rates (6.75%) help spur growth.
However, he says this is not reflected in the price of the stock, which is trading at a discount to its net asset value.
Another property company in Parks' top 10 is the South Korean-based GS Engineering. He says: "After several years of downturn, the Korean property market is showing signs of bottoming out with building permits beginning to recover."
Domestic consumption has also been a driver behind the fund's positioning, with retail sales steadily rising after mediocre growth in 2004.
In Malaysia retail sales increased by 7% in 2005, while Hong Kong saw a 5.3% lift for the year ending May 2006 and Korea saw a 5.4% rise for the year ending April 2006.
One stock expected to benefit from the increase in consumer spending is Malaysian-based investment holding company Genting, as a large part of its revenue is derived from its subsidiaries in the leisure and hospitality, gaming and entertainment businesses.
As a result, Parks expects its dividend payout to increase as the cashflow from its gaming operations improves.
Despite a positive outlook for the retail and construction industries, Parks does not share this view for technology companies. He believes a global slowdown could have a negative impact on the sector as revenue from export sales falls.
Overall, Parks long-term view on Asian economies and markets is positive.
He says: "Long-term growth prospects for the Asia Pacific region are expected to remain superior to those of the developed world, driven by supportive demographics, high savings rates, cost competitiveness and an increasingly educated workforce. This makes an increasingly positive contribution to the growth outlook.
"From an economic perspective, the general message is, Asian economies are still performing better than their global counterparts, despite a more unsettled external backdrop and concerns over the direction of international interest rates and the continuing high cost of oil and other commodities.
"Asian companies have be-come more successful at converting economic growth into earnings growth. Asian corporate returns on equity now compare favourably with the rest of the world, yet valuations have lagged this improvement at 12 times 2006 earnings and the region remains attractively price."
Stuart Parks, fund manager
Parks joined Invesco Perpetual (formerly Perpetual) in January 1994, and is currently head of Asian equities. He began his investment career in 1985, joining Wood Mackenzie where he analysed UK financial stocks. In 1989, he became a Far Eastern fund manager at London Life and subsequently gained further exposure to the region working for Swiss Bank Portfolio Management International and GAN Fund Managers. He holds an MA in Modern History from Oxford University and is a member of the Institute for Investment Management and Research.
Annualised three-year return 27.58%
Minimum investment $2,500 (£1,334)
5.25% initial charge
1.5% annual management charge
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