Asia was once the world's hottest investment destination. Blessed with fast economic growth and a young population, the region was expected to help transform the world's economic development.
Fast forward to the present day and the eastern world is fast becoming one of the most unloved areas to invest, with market jitters stemming from a selloff in the Chinese equity market. Indeed, Asian markets have fallen by more than 23% since mid-April. It's almost easy to forgive investors for wanting to jump ship given recent market volatility.
It is always unnerving when stock markets fall sharply. It is also a natural human instinct to follow the herd and sell investments before share prices potentially fall further. When it comes to investing, refraining from making irrational, short-term decisions often turns out to be the right thing to do, even though it may sound uncomfortable. Furthermore, short-term setbacks can present a good buying opportunity.
There may well be further turbulence to come, although contrarian investors with strong constitutions may well be rewarded for remaining invested in this out-of-favour region over the long term. The First State Asia Pacific Fund, managed by veteran investor Angus Tulloch and First State's Asian equities team, take a conservative approach to selecting companies, which could help curb volatility in what is a high-risk area of the investment world.
The team are particularly cautious in the current environment. They have long been concerned about high levels of debt and slowing growth in China. Indeed, according to the team, consumer debt has risen in every Asian country since the financial crisis apart from in the Philippines. As such, their focus on businesses more likely to withstand economic uncertainty could be prudent. They specifically seek cash-generative companies which have built barriers against possible competition, sound balance sheets and pricing power.
Historically, the fund has been tilted towards defensive areas of the market and higher-quality, larger companies. This strategy has traditionally helped shelter investors from the worst of any stock market falls. The chart below, for example, shows the worst five months for the MSCI Asia Pacific ex Japan index since the fund's launch in June 1988, alongside the fund's performance for that same month. The fund has held up considerably better than the index in a falling market, although this means the fund tends to lag a rising market. However, the idea is that by losing less in the bad times, you don't have to do so well in the good times to outperform over the long term. Although, there are no guarantees and past performance should not be seen as a guide to future returns.
Fund performance in a falling market
Source: Lipper IM, correct at 30/09/2015
Our view on this fund
It has been a remarkably difficult period for global markets, with Asian and emerging markets witnessing the brunt of the selloff. In our opinion, growth across the Asia Pacific region is a long-term story and we believe the First State team have the ability to deliver for patient investors willing to adopt a long-term outlook.
In what can be a volatile sector, a conservative, flexible approach seems sensible. First State has one of the longest and most successful records in managing Asian equities and we have confidence in their ability to outperform the wider market over the long term. The team also have the flexibility to invest in higher-risk smaller companies.
Please note this adventurous fund is closed to new investment. We continue to hold the team in high regard and believe changes do not need to be made to an existing portfolio, providing the portfolio's objectives continue to be met. For new investment, the Wealth 150 features our favourite funds in the Asia Pacific sector.
Please read the key investor information document in addition to the information above.