far east and pacific ex-japan funds felt the pressure of the technology downturn but have been cheered by more domestic demand
Far East equity and Pacific ex-Japan funds have faced a volatile time over the past three years. International markets and exposure to the technology and the internet bubble have caused downward pressure, while growing domestic demand in the region has provided a boost.
Some of the best performers have been funds of funds that have been able to diversify away much of the risk. The OAM Asian Recovery fund, which was launched during the Asian crisis in December 1998, has been one of the best in the asset class over the past three years.
Between 10 January 1999 and 10 February 2000, the fund's performance was 17.85%. From then to 10 January 2001 it fell by 1.37%, then up to 10 January 2002 rose again by 28.36%.
Coming out of the Asian crisis, 1999 and 2000 were good for investors in the region and valuations were cheap, says Desmond Kinch, the fund manager. But in 2000 the markets came tumbling back down again. 'First, there was deflation of the technology sector, which Asia is quite exposed to, and markets such as Hong Kong got caught up in the internet hype,' says Kinch.
During the first nine months of 2001, the markets continued to fall in line with others around the world to September 2001, when they bottomed. From September 2001 to March/April 2002, the region experienced a six-month recovery in line with other world markets.
The fund had a 'huge run' from the end of September 2001 to May/June 2002, says Kinch.
Since then, the markets and the fund have dropped back again. The main reason for the fund's outperformance over the period is its resilience, believes Kinch. The fund has maintained a disciplined value approach that has seen it through difficult patches, he says. Its fund of funds approach has helped diversify the fund and reduce risk.
Kinch has allocated money to boutique managers in Asia who take a strict value approach. 'They stick to firms with strong balance sheets and little debt and considerable amounts of cash. The firms are all self-financing and do not need to go to the equity markets to raise capital for expansion,'says Kinch.
The funds he invests in generally have limited assets under management so they can invest in small and medium cap stocks, which is where the best opportunities are, explains Kinch.
Sector-wise, the fund has benefited by targeting companies that serve the Asian consumer. Domestic consumption is rising in many parts of Asia and has huge potential. Savings rates are high and leaves room for increased spending as consumers in the region become more affluent and confident.
The Irish Life International Emerging Markets Asia Equity fund is another strong performer in the region. Between 10 January 1999 and 10 February 2000 its performance rose by 15.56%. From then to 10 January 2001 performance fell by 12%, but to 10 January 2002 rose again by 9.98%.
As with the OAM Asian Recovery fund, this offering has protected itself through diversification. It is a fund of funds that invests in two underlying funds, each with 50 to 70 positions.
In 2001 and early 2002, Asian markets decoupled from developed markets, says Hooman Kaveh, investment director of Irish Life International multi manager products.
As developed markets fell investors saw more opportunity in Asia because of better fundamentals, he says. That period came to an end as Asian markets were affected by world markets and fell again. One factor that has helped the fund preserve value in market down periods has been its overweighting in Australia. The defensive nature of Australian stocks, which are resource and commodity based, has helped the fund remain resilient, says Kaveh.
The Panda Sicav has also performed well relative to its peer group. From 10 January 1999 to 10 February 2000 its performance rose by 24.1%. From then to 10 January 2001 it fell by 19.24% and rose again to 10 January 2002 by 16.13%.
In 1999, the fund was helped by a rise in stock markets in the fourth quarter led by the TMT sector, says Choo Yoon Lai, the fund's manager. That bubble collapsed over the rest of the period, denting the fund's performance.
Its attention shifted to China-related companies and firms likely to benefit from a growth in domestic consumption. In the fourth quarter of 2001, stock markets rallied after signs that the US economy had bottomed.
Technology stocks and traditional cyclicals such as the steel and auto sectors rose and Panda underperformed in the quarter as it has little focus on such stocks, says Yoon Lai. In 2002, South Korea gained favour with investors and many of the fund's positions there performed well. The share price of Shinsegae Department Store, for example, gained more than 50% in the first few months of the year, says Yoon Lai. Another of the fund's larger holdings, Esprit Holdings, enjoyed a re-rating when it bought the brand name in the US.
Chartered Asset Management's CAM-GTF fund also performed well over the past three years, despite difficulties caused by a shift in its market focus. Its performance rose by 20.47% between 10 February 1999 and 10 January 2000, then fell by 16.73% up to 10 January 2001, before rising again by 24.16% to 10 January 2002.
The fund was originally a South East Asia fund from 1999 to 2000, with 15 holdings in Singapore, Malaysia and Indonesia.
In the first quarter of 2001, its mandate was changed to include north Asia. This meant a move of 40% into Korea and shifted the bias of investments to consumer staples and basic manufacturing for export.
The fund found broader, more predictable industries that aided the fund's performance, says Colin Lee, managing director of Chartered Asset Management.
The affects of the internet bubble bursting in 2000 were exaggerated in the fund for two reasons: it was heavily weighted in that sector at the time and in the process of moving into Korea. The fund's venture capital approach has also proved a danger in down markets as it causes a bias towards illiquid small and medium cap stocks.
However, the approach can lead to good returns and Lee has reduced risk in the portfolio by 'knowing the companies inside out'.
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