2019 Best Asia-Pacific Equity Fund Winner Q&A - First State Dividend Advantage

M: Morningstar F: First State

M: Can you highlight any major changes you made to the portfolio over the course of 2018? Were there any particular holding(s) that drove the fund’s performance for the year?

F: Major activity over the year included the purchase of Cognizant Technology Solutions, on expectations of a turnaround in the Indian technology outsourcing sector. The valuation seemed attractive for what looked like improving margins and steady growth. We also purchased Jardine Cycle & Carriage, on signs of a recovery at subsidiary company Astra and a promising outlook for its investments in Vietnam.

Conversely, we disposed of Fast Retailing due to expensive valuations and sold Hanon Systems amid concerns over a downturn in the autos cycle. Hanon’s recent acquisition at the top of the market raised fears of a highly geared balance sheet along with slowing growth.

In terms of performance drivers, top contributors included CSL Limited, which saw accelerating demand for both its flu vaccines and its core immunoglobulin products, particularly as plasma can increasingly be used as a secondary treatment for haematological cancers. ENN Energy strengthened on future growth expectations. We believe China’s ongoing commitment to environmental policies should continue to fuel higher levels of gas consumption. Meanwhile, Tata Consultancy Services reported an uptick in revenue and margins. TCS’s business model is evolving towards higher margin ‘digital transformation’ consultancy services, where it had secured a number of deals with large clients such as Transamerica, Marks and Spencer and Rolls Royce.

M: What is your outlook for 2019 specific to the markets you cover, and how are you positioned to take advantage of opportunities and/or mitigate potential risks?

F: We fear that it is the same old issues – rising interest rates, slowing demand growth, lower global trade volumes, and debt-laden companies and governments – that will challenge Asian equity markets again this year. If, as some macro forecasters suggest, the US economy weakens this year (as fiscal stimulus packages expire), perhaps China’s bolstering domestic policies might prop up the global economy instead. On the other hand, the ongoing war of attrition between the two countries on trade imbalances and other ‘unfair trade practices’ seems likely to weigh on global markets for some time yet.

As bottom-up investors, we believe risk management should operate at the stock level. The best way to avoid losses for clients in the medium term is to own good quality companies that are able to respond to market uncertainties; and to buy these companies at a reasonable enough price level that should make it possible to earn acceptable returns over the medium to long term.

M: How have financial market risks, such as the ongoing trade war between the United States and China and tightening monetary policies in major economies, impacted your recent investment decisions? What are some underreported risks that could surface in 2019 or beyond?

F: We are under no illusions about our ability to predict macro events, nor do we pay too much attention to the gyrations of the market. We prefer to spend our time researching companies and talking to management instead. We remain resolutely-focused on quality (of management, franchise and financials), which has helped our Asian portfolios remain relatively defensive amidst the market volatility. While we understand that such periods are worrying for clients, they provide us with opportunities to top up our holdings and buy into quality companies at cheaper prices – thus contributing to better long-term absolute returns.

M: How is your investment team organized? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future?

F: Everyone on the investment team is first and foremost considered an analyst and this includes all portfolio managers. Every team member performs a broad ranging investment analyst role and is encouraged to participate in the generation of ideas for all client portfolios.

While we have no specific hiring plans, we are always on the look-out for talent that share our investment philosophy and would fit with the team’s culture.

M: Where do you feel that the investment team or the investment process can be improved upon in the future?

F: We take great care to evaluate the investment team and our investment process on a regular basis to avoid falling into complacency. That said, our investment philosophy (which is centred on identifying quality companies, buying them at a sensible price and holding for the long term), has remained largely the same since the launch of the team’s first Asia Pacific equity strategy in 1988.

We place strong emphasis on high quality proprietary research and direct contact with the companies in which we invest. The consistency of our investment approach and our absolute return mind-set aims to avoid being influenced by the market – whether that be market euphoria or pessimism. Our reputation as successful long-term investors and the framework we operate means that are able to look past the quarterly numbers and focus more on secular drivers of risk and return.

View all Morningstar Singapore Fund Awards 2019 articles here.