FSSA Asia Focus: March 2022 fund update

• This fund is run by a manager and team with a great pedigree of investing in Asia
• We like the culture and philosophy at FSSA – the managers view themselves as stewards of investors' capital, looking after it as though it's their own
• Martin Lau has an impressive track record of investing in some of the region's best-performing companies over the long run
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

Long-term growth is the main aim of the FSSA Asia Focus Fund, and the investment approach means we expect some more stability in returns compared with others in the Asia sector. The fund could fit with other Asian funds that use a different or more adventurous investment approach, or form part of a broader global portfolio with a long-term outlook. It invests in higher-risk emerging Asian countries, such as China, India and Taiwan, as well as more developed Asian economies, including Singapore and Hong Kong.

Manager

Martin Lau is the lead manager of this fund. He is a highly regarded Asian fund manager and has invested in the region for more than two decades. In that time, he's managed several funds that invest broadly across Asia, as well as those that focus specifically on China, an area he specialises in. He’s managed the FSSA Asia Focus Fund since launch in 2015. Since joining the group in 2002, he’s built an impressive track record investing in these markets.

Lau is a humble fund manager and open about both what has worked well and what hasn't in his funds. These are qualities we like. While we rate him highly, he isn't a one-man band. He's got a good-quality team of investors around him, who all follow the same investment philosophy and provide each other with important challenge before stocks make it into their funds. Some of these team members are also portfolio managers with good track records in their own right.

Process

Lau and his team look for quality companies they can invest in for the long term. They like those with a competitive advantage that others struggle to replicate, such as a well-known brand or the ability to raise prices for their products without affecting demand from customers. They should have the potential to grow earnings sustainably over the long run and be run by reputable management teams that don't take unnecessary risks in the pursuit of short-term gains. The broader team is made up of investors dedicated to looking after clients' money as if it's their own.

The fund currently mainly focuses on sectors that could benefit from rising consumer spending, such as technology, financials, and companies that produce consumer staples such as food and beverages or personal care products.

As a long-term investor, Lau doesn’t change too much in the fund from year to year. He often sells shares in companies that have performed well and could have less room to grow in future and buys more shares in companies that have been weaker, but still have growth potential.

We saw this over the past year – the Chinese stock market fell, and the manager used this as a chance to add to companies he views as high quality at lower share prices. This included Ping An Insurance and e-commerce company JD.com. He also added more to an existing investment in property company China Resources Land. China currently accounts for 26.6% of the fund.

On the other hand, exposure to India has decreased – after performing well, Lau believes there is less room for share price growth for some companies, so he took the opportunity to sell shares and take profits for new opportunities. That said, India still makes up around 20% of the fund.

Elsewhere, the fund maintains a meaningful position in the financials sector, currently making up around 24%. The manager thinks the potential for higher interest rates could benefit financials, especially banks in Singapore and Hong Kong, as it means they would make more money on cash deposits and loans.

Culture

We like the culture and philosophy that's been cultivated at First State Stewart Asia (FSSA, part of the broader First Sentier Investments group). Their philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and engage with companies to make sure they're run in a way that'll benefit all shareholders.

Companies must also consider environmental, social and governance (ESG) factors, and the team won’t invest in tobacco, gambling, or weapons manufacturers. While they can invest in any other sector, companies should cause little, if any, harm to the environment around them or the labour they employ, for example. Over time this has become an increasingly important part of the team's investment process. If they don't think a business meets these standards or is doing enough to address a problem, then they won't invest.

FSSA also places emphasis on recruiting and maintaining great people. Every manager and analyst advocate the team's overriding philosophy. At the same time, their individual personalities are allowed to shine, and they're encouraged to bring their own ideas to the table.

Lau is a Managing Partner of FSSA, so we think he's incentivised to ensure the business, including its funds and people, are successful. He looks after its team of analysts and fund managers, which means he can pass on his knowledge and experience. It also means he has additional responsibilities, but we're confident he spends most of his time focused on looking after his clients' money.

First Sentier Investments was acquired by Mitsubishi UFJ, a Japanese bank, in 2019. Takeovers can sometimes lead to disruption and corporate change, though positively FSSA remains an independent investment team.

Cost

This fund has an ongoing annual charge of 0.90%, but we've secured HL clients an ongoing saving of 0.15%. This means you pay a net ongoing charge of 0.75% and makes the fund one of the lowest-cost active funds available in the Asia Pacific ex Japan sector through HL. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Lau has built an excellent long-term track record. The FSSA Asia Focus Fund has performed better than the average fund in IA Asia Pacific ex Japan sector since launch in 2015. Other funds Lau has run over longer periods have also performed well. Our research shows he's achieved this by focusing on the prospects of individual companies, rather than taking a view of the wider economic environment. Past performance isn't a guide to future returns though, and all investments fall as well as rise in value so you could get back less than you invest.

Lau and his team are conservative in the way they manage money and aim to limit losses in a falling market. They invest in companies they think will see consistent demand for their products or services and prosper over the long term, rather than chasing short-term fads. It means the fund has tended to hold up relatively well when markets have been rocky but has lagged when they’ve risen strongly.

The past year has been a tougher one for Asian markets, compared with a strong 2020. Much of the weaker performance came from China, which was partly because large tech companies with high growth expectations fell out of favour. Other sectors, like property, were hurt by regulatory crackdowns from China’s authorities.

While the IA Asia Pacific ex Japan sector average fell 5.52%* over the past 12 months, the fund held up relatively well and fell 1.16%. We think this puts the fund in a stronger position when markets recover. Having less invested in large Chinese tech companies compared with other funds helped performance.

Companies that added to performance over the year include Chinese energy companies ENN Energy and Zhejiang Chint Electrics, as well as Techtronic Industries, which makes power tools and is based in Hong Kong.

Past performance is not a guide to the future. Source: *Lipper IM to 28/02/2022.

Find out more about FSSA Asia Focus, including charges

FSSA Asia Focus Key investor information