Best Asia-Pacific Equity Fund: Winner

We spoke to the manager and asked him about his strategies. Here is an edited excerpt:

Question: How was the portfolio positioned to navigate the coronavirus-driven market volatility in 2020? What were the themes and holdings that drove the fund’s performance for the year?

Answer: The portfolio was well-positioned to navigate the volatility that we saw as a result of the pandemic. (The portfolio returned 50.4% compared with the benchmark’s 19.7% (gross, USD), thus outperforming by 30.7%.)
 
The portfolio invests primarily in equities across the Asia-Pacific region including Japan and is focused on 55-75 high-conviction ideas. The investment style is based on bottom-up stock selection and is an unconstrained, all-cap portfolio. Stock selection has been the consistent performance driver, with significant contributions from the e-commerce/Internet, consumer staples, healthcare, and technology sectors. Stock selection was positive in nine out of the 11 sectors during 2020.

Although there has been significant activity at a stock level, overall positioning remains relatively unchanged. In particular, the portfolio has significant exposure to the technology and healthcare sectors, balanced by very limited holdings in financials. Our favoured positions are often in smaller companies that have invested heavily in their core technologies over several years to establish a sustainable, competitive edge. From a country perspective, the fund has significant exposure to North Asia, especially Taiwan and Korea, with very limited holdings in South Asia and India.

Question: Against the backdrop of (i) the vaccine rollout, (ii) a new US administration, and (iii) ongoing monetary easing globally, what is your outlook for 2021, and how are you expressing these views?

Answer: Going into 2021 we expect markets to continue to experience a risk-on environment, particularly given the liquidity that is being provided from the world’s major central banks. However, we do expect there will be risk-off periods throughout the year. This could come about as markets are concerned over the sustainability of liquidity and potentially a tightening in particular on the fiscal policy side given the high base in 2020.

Unlike last year, where a number of themes led the Asian region up, our belief going into 2021 is that returns will be more selective and there will be a greater emphasis on real economy recovery plays as the focus switches to a rebound in earnings.

The year has started on a reasonably good footing underpinned by the new US administration’s plans for further massive fiscal support, and the successful rollout of the vaccine has boosted markets. Against this backdrop, we remain constructive on non-US markets given more favourable valuations, positive growth outlook given the strong economic recovery, and a weaker US dollar–in particular we remain positive on the Asian region.

Question: What are the top risk factors that could have an impact on your portfolio, and how are you positioned to mitigate these potential risks?

Answer: The principal risk is managing the liquidity risk premium given the emphasis in the portfolio on smaller companies. As the portfolio grows in size, it is imperative this risk is managed prudently. That involves owning a larger number of smaller companies and increasing the exposure to larger companies with compelling business models.

Question: How is your investment team organised? 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?

Answer: The firm adopts a team approach to portfolio management. The Asia-Pacific portfolio management team has an average of 22 years’ experience in managing a wide range of regional and single-country Asia-Pacific products. The Oriental Income Fund is managed by Stuart Winchester. Based in Hong Kong, he draws on our network of country specialists, regional/country/sector analysts, Grassroots® Research analysts, and other investment professionals across the platform when constructing the portfolio. 

There have been no major changes to the investment team or structure over the past year. Looking forward we do not expect to make any major changes to the team.

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

Answer: We are constantly reviewing the way that we work and approaches that we can improve. This has obviously been tested during the past year in the pandemic and continues to be the case.