Stewart Investors Asia Pacific Leaders Sustainability Fund: August 2023 update

• The managers have a wealth of experience investing in Asian companies
• Stewart Investors are a close-knit team with a clear investment philosophy
• Performance has been strong since launch, especially in falling markets
• This fund is not on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Stewart Investors Asia Pacific Leaders Sustainability fund aims to grow your investment over the long term by investing in high quality companies that mainly operate in the Asia Pacific region such as India, Taiwan, Australia and China. Unlike their benchmark, the managers also invest in several companies listed in Japan too.

We think the fund could be used for broad exposure to Asia or to diversify a global investment portfolio. Investments in emerging markets add risk and the associated volatility should be considered when constructing a long-term portfolio.

Manager

David Gait has been lead manager since 2016 and is Head of the Investment Team at Stewart Investors. He joined the company as a graduate in 1997 and has built up a wealth of experience and played a crucial role in developing their Asian investment strategies.

Sashi Reddy serves as deputy manager and joined Stewart Investors back in 2007, where he initially offered analysis and research support to portfolio managers, mainly concentrating on Indian companies.

Gait and Reddy receive support from a close-knit team of other fund managers and analysts. Whilst both manage other funds alongside this one, we believe they can comfortably handle these responsibilities given the overlap in approach and supportive team dynamic.

Process

The investment approach at Stewart Investors has been grounded in the same philosophy since 1988. This philosophy is built on stewardship, where fund managers treat investors' capital as their own and strive to grow wealth over the long term while minimising losses during periods of uncertainty.

‘Quality’ is a broad term in the investment world but for the managers at Stewart Investors it centres around three key pillars: management, franchise, and financials. The managers are hunting for companies with robust financial strength and sustainable growth prospects. They put great emphasis on the people and culture within businesses, only choosing to invest in companies led by management teams they trust and deem to have integrity. Many of the companies they own also still have a degree of founding family ownership.

The managers construct the portfolio using a ‘bottom-up’ approach which means it can look quite different to the benchmark. Currently they invest in around 40 companies with information technology, consumer staples and healthcare businesses accounting for over 60% of the fund. In contrast, these three sectors only account for roughly 30% of their chosen benchmark.

Geographically, almost half the portfolio is invested in India, an area where Stewart Investors have lots of expertise. Whilst their benchmark has no exposure to Japan, the managers have found an increasing number of high-quality companies here that carry out most of their business within Asia. To invest more in Japan and provide additional flexibility, the fund is in the IA Specialist sector.

As the word ‘leaders’ in the fund name suggests, large and medium-sized companies are the primary focus with companies typically requiring a market capitalisation of at least $1bn.

When making any investment the managers take a long-term view, so they don’t tend to make too many changes. Over the past six months three new investments were made including Telkom Indonesia, an Indonesia communication services business, and Chinese pharmaceutical company Yifeng Pharmacy Chain. The third was German semiconductor manufacturer Infineon Technologies which generates a significant amount of its revenue in Asia.

In contrast, Indian materials business Pidilite Industries was sold on valuation grounds alongside Hong Kong industrials firm Techtronic Industries, due to a re-evaluation of the management teams’ quality.

Culture

We think the culture and philosophy that has evolved at the group over the years is attractive. The team doesn't put personal gain ahead of its investors and looks for companies that treat their customers in a similar way. It also places emphasis on recruiting and maintaining great people. Every manager and analyst advocate the team's overriding philosophy.

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

ESG Integration

For the team at Stewart Investors, ESG considerations are much more than a label or box to be ticked. Taking these factors into account is a natural extension of the same investment process they’ve used for decades. The team’s philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and want to make sure it’s run in a way that’ll benefit all shareholders.

ESG issues form a core part of this. For example, they don’t like companies that make reckless decisions in the pursuit of short-term gains, rather than focusing on longer term, more sustainable growth. A business shouldn’t exploit its workforce, take advantage of tax loopholes, or skirt around industry legislation. Importantly, it should cause little, if any, harm to the environment around it. First Sentier has made a firm-wide commitment not to invest in companies whose primary business is to make cigarettes (or other tobacco products), or controversial weapons.

Cost

The fund usually has an annual ongoing charge of 0.85%, but with a 0.05% saving it’s available to HL clients for 0.80%. The saving is achieved through a loyalty bonus which may be taxable if the fund is held outside of an ISA or SIPP. The HL platform charge of up to 0.45% a year also applies.

Performance

Gait has built up an impressive track record over his career. Taking this fund and the Asia Pacific Sustainability Fund that he's run since 2005, he has performed better than the broader Asia Pacific stock market. We put this down to his stock picking ability and ability to identify long-term winners. As always, past performance isn't a guide to future returns.

Over the past year (to end of July 2023) the fund has fallen by -1.09%*, underperforming the benchmark return of 0.81%. Our analysis suggests that Indian companies like Mahindra & Mahindra, HDFC and Godrej have helped performance over this period. On the other hand, investments in China like Foshan Haitain Flavouring, Glodon and Silergy Corp have held back performance. The Chinese stock market has been in the doldrums so far this year following lacklustre economic data, as well as some political and regulatory concerns.

The managers' focus on quality companies and a more conservative investment style means the fund has tended to hold up better when the region’s stock market falls but doesn't quite keep up when it rises. This has led to an attractive performance profile over the long run. Investors should be aware that this fund is invested quite differently from the broader market, largely due to its significant overweight to India and much lower exposure to China. Therefore, its performance profile can look rather different from the benchmark.

We think this fund uses a solid process and we’re positive about the fund's long-term prospects. That said, we currently have other Asian funds adopting a similar style and have performed well on the Wealth Shortlist. All investments can fall as well as rise in value so you could get back less than you invest.

Past performance is not a guide to the future Source: *Lipper IM to 31/07/2023.

Find out more about Stewart Investors Asia Pacific Leaders Sustainability Fund including charges

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