Can Asia keep delivering? Even amid the current volatility impacting markets globally, we believe the case for Asia remains fundamentally positive. Increasingly numbers of US, European and Japanese companies are outsourcing their products and services to Asian companies. This is a trend that looks likely to continue and one which will benefit the region’s economy.
A wide range of factors are taken into account when we seek ideas for the fund: companies with strong franchises, sound financials, solid management teams, high profit margins and low volatility are all key considerations. Holdings are bought where the manager sees potential for upgrade and where they fit into current themes.
Structural and short term themes are also important considerations for the team and how they select – and de-select – stocks. Current structural themes such as urbanisation, infrastructure development and growing consumer wealth are themes that can lead to exciting stock opportunities.
The fund follows a disciplined team-based approach with stock selection responsibilities split by country rather than sector. The team has four members, each of which is a specialist in their given markets.
Although there is a large degree of individual freedom within this structure, each manager’s remuneration is based on the total performance of the fund rather than on their individual contribution. This engenders a constructive team dynamic (the founder members of the team have worked together since 1996) with the emphasis on generating steady consistent returns, and ultimately strong long-term performance.
Over the last 10 years the fund, which holds between 55-75 stocks, has beaten the IMA Asia Pacific Ex Japan sector by 80 per cent. Since 1995, the fund has outperformed the sector median in 11 of the last 12 years, with the fund returning 211 per cent against the sector’s average return of 183 per cent over the last five years, and 95 per cent against a sector average of 85 per cent over the last three years.
The fund operates in a strict control environment. The team works within various parameters and these are reviewed weekly in order to ensure that each manager is taking an appropriate level of risk, and that they understand where that risk is coming from. Complementing that approach is what we believe is an unusually rigorous sell discipline. We seek to sell as aggressively as we buy, thus avoiding the trap of holding favoured stocks no matter how it performs.
Detailed country knowledge is also extremely important. In depth experience and understanding of each country allows us to invest in markets we believe will add most value in different economic circumstances. This maximises each manager’s country-specific expertise and enables the fund to keep pace with – and benefit from – the fast-changing nature of Asian markets.
Despite the region’s reputation for volatility, the Resolution fund is one of the most consistent performers in the sector. We believe it best suits investors running higher risk or adventurous portfolios who have a long-term investment horizon and who are seeking capital growth rather than income. The Far East is characteristically volatile and investors should be prepared to accept the risk of short-term capital losses, with the potential payoff of strong gains over the long term.
The key factor to remember when talking about Asia is that its economies are developing important internal sources of growth which will gradually erode the dependence they have historically had on the US and Europe. Primarily for this reason, we believe the Far East (ex Japan) offers one of the world’s most compelling investment opportunities for those investors who are committed to investing over the longer term.
Andrea McNee is chief investment officer, international equities, Resolution Asset Management