Lower oil prices and monetary easing are proving to be a tailwind for a large part of Asia, while the two key economies in the region, China and India, are continuing with their reform drive.
China’s onshore market has recently corrected. But China’s central bank moved quickly to cut interest rates and the reserve requirement ratio for banks, the fourth time since November.
In India, the much-anticipated structural reforms are yet to materialise and markets are choppy owing to disappointing corporate earnings. However, the Reserve Bank of India has recently cut rates, which is good for the market.
Deutsche Asset Management recently said if economic growth picks up, India will have 12-14% annualised earnings growth for the next three years.
Yet Southeast Asia is much less attractive. Valuations generally are high compared to the rest of Asia and growth is slowing in Indonesia, Thailand and Malaysia.
"Being benchmark-agnostic, both funds show a significant deviation in the top 10 holdings and country breakdown"
Against this backdrop, Fund Selector Asia compares two well-known products that invest in the region: the Aberdeen Global Asia-Pacific Equity Fund and the First State Asia-Pacific Select Fund.
The Luxembourg-domiciled Aberdeen fund was launched way back in 1988 has a far longer track record than the First State vehicle, which has been in existence since March 2010.
The Aberdeen fund is larger with $7.5bn in assets under management on 31 May. The First State fund had $77.5m in AUM on 31 May.
As the name suggests, both funds invest in Asia-Pacific markets and follow a bottom-up investment approach. But their investment style differs.
Luke Ng, senior vice president at FE Advisory Asia provides a comparative analysis.
Investment strategy review
The Aberdeen team aims to identify investment ideas at reasonable or cheap valuations. They believe share prices will reflect underlying business fundamentals over the long term, Ng said.
“The Aberdeen team shares a cautious mindset and intends to have a thorough understanding before they actually commit to invest into a business.”
The investment decision process, as a result, becomes lengthy and actual investments are made after a series of meetings with the investee company’s management. The team avoids investment in companies with high share valuation.
“The team often views themselves as stakeholder or strategic partner of a business rather than an investor, and therefore they are prepared to invest for the long term,” said Ng.
Most of the top 10 holdings have been held for more than 10 years, he pointed out.
By comparison, the First State team tends to adopt an absolute return approach, said Ng.
“The team focuses both on potential downside as well as upside when making investment decisions. The aim of the stock selection process is to identify sensibly-priced high-quality companies that can deliver sustainable long-term earning growth.”
Furthermore, the Aberdeen fund is biased toward value stocks whereas the First State product focuses on growth stocks.
Both funds use the MSCI AC Asia-Pacific ex-Japan as the benchmark index. But both teams do not follow it and primarily adopt a bottom-up stock selection approach. Being benchmark-agnostic, both funds show a significant deviation in the top 10 holdings and country breakdown, Ng said.
The Aberdeen fund has a strong focus on Hong Kong and Singapore while the First State fund has been investing aggressively in India over the past year, Ng added.
Both funds are underweight China. The Aberdeen fund has a 7.7% weighting to China compared to First State fund’s 9.1%.
“The Aberdeen team, in particular, is of the opinion that China companies are less willing to take care of minority shareholder interests and have potential governance issues,” said Ng.
As a result, the Aberdeen team prefers to tap China exposure by investing in Hong Kong stocks, he said.