Stewart Investors Asia Pacific Leaders Sustainability: September 2021 fund update

How it fits in a portfolio

The Stewart Investors Asia Pacific Leaders Sustainability Fund aims to provide long-term growth by investing across Asia Pacific markets, including India, Taiwan, Australia and China. The fund invests more in Japan than its benchmark and many other Asia Pacific funds, which makes it different. The fund could be used for key exposure to Asia and provides a way to diversify a global investment portfolio. Investments in emerging markets adds risk and the associated volatility should be considered when constructing a long-term portfolio.

Manager

David Gait is a long-standing member of Stewart Investors’ Asian equities team. He joined the team in 1997 and has been fundamental in helping to evolve the group's Asian investment strategies.

Gait took over management of the Asia Pacific Leaders Sustainability Fund in 2016. He's also managed the Asia Pacific Sustainability Fund since 2005 and Pacific Assets Trust since 2010, which both use a similar investment process. These three funds are his main responsibility, though his experience and longevity at Stewart Investors means he’s co-manager or deputy manager of a number of other funds, including the Indian Subcontinent Sustainability Fund. Every fund at Stewart Investors has a co- and deputy manager to provide adequate support.

Overall, we think Gait’s responsibilities are manageable and are pleased to see he dedicates his time to company research, fund management, and mentoring junior members of the team. On this fund Gait also has the backing of other respected fund managers and a close-knit team of analysts. Some of these team members manage other funds with good track records in their own right.

Process

Stewart Investors and its fund managers have based their approach on the same investment philosophy that dates to 1988. The philosophy is founded on stewardship, and the team invests investors' capital as though it's their own. They aim to grow investors' wealth over the long term, while limiting losses when markets fall.

In this fund Gait invests in quality companies he believes can deliver sustainable and predictable growth over the long term. He likes cash-generative businesses, which are in good financial health and could withstand periods of economic volatility. The manager also puts emphasis on businesses’ people and culture, and only invests in companies he believes are run by management teams with integrity.

Gait focuses on sectors that are typically more defensive, which means they're expected to hold up a bit better when markets are weaker. This includes the consumer staples and healthcare sectors, which tend to sell products and services that people often continue to buy, regardless of what's going on in the wider economy.

The manager currently finds some of the most attractive long-term opportunities in countries such as India, where 42.4% of the fund is currently invested. This is a significant amount, though Gait notes that many of these companies carry out business overseas as well as in India. This provides diversification in terms of where they are making profits and means they don’t only rely on the domestic economy for success. New investments in Indian companies over the past year include insurance company HDFC Life and information technology company Infosys.

The manager is more cautious in his outlook for China, believing the profits of some companies could be limited due to state intervention. As a result, just 7.5% of the fund currently invests in Chinese companies compared with almost 34% for the benchmark. Gait has focused on quality companies that invest wisely in their businesses for the good of investors, with less involvement from the government.

The fund also has more invested in Japan (currently 12.5%) than most Asia Pacific funds. Funds in the IA Asia Pacific ex Japan sector can invest up to 5% in Japanese companies. However, over the years Gait has found an increasing number of high-quality companies that are based in Japan, but carry out most of their business within Asia, particularly China. To invest more in Japan and provide additional flexibility, the fund is in the IA Specialist sector.

Current Japanese holdings include consumer goods business Unicharm and medical technology firm Hoya. Paint manufacturer Nippon Paint was sold at the end of last year as it had been a successful investment and the manager believed it no longer offered as much value. He still views it as a great company though, so he reinvested recently when its shares fell and could be bought at a more attractive price.

Culture

Stewardship and sustainability form a core part of this fund's investment strategy, and it's become an increasingly important part of the process over the years. Gait focuses on companies he believes could benefit from and contribute to the sustainable development of the countries they're based in. Analysing environmental, social and governance information helps the manager understand more about the quality of companies, and he thinks a long-term investment horizon makes sustainability even more important.

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.

Stewart Investors forms part of First State Investments, which was acquired by Mitsubishi UFJ, a Japanese bank, in 2019. Takeovers can sometimes lead to disruption and corporate change, and there has since been some change within the team, though positively Stewart Investors remains an independent investment team. As always, we continue to look out for potential further change.

Cost

This fund has an ongoing annual fund charge of 0.84%, but a discount of 0.05% is available for HL investors, which reduces the charge to 0.79%. This is reasonable compared with other Asia funds. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. Investing through HL, a platform fee of up to 0.45% a year also applies.

Performance

David Gait has a strong, long-term investing track record. Taking his whole fund management career, which includes the Asia Pacific Sustainability Fund that he's run since 2005, he has outperformed the broader Asia Pacific stock market. As always, past performance isn't a guide to future returns.

He took over the Asia Pacific Leaders Sustainability Fund in 2016 and initially it didn’t perform as well as the market. It has had a strong year though, and over 12 months to the end of August 2021 the fund has grown 29.9% compared with 17.3% for the market.

Over this time, India has been one of the strongest performing Asian stock markets, while China has been weaker. This has helped the fund’s performance by having a bias to India, but less invested in China. The manager’s individual stock picks have also performed well, with strong returns from companies including Tech Mahindra, which is based in India and provides information technology services, and Japan’s Hoya.

Given the manager's focus on quality companies and a more conservative investment style, the fund has tended to hold up better when the Asian stock market falls but hasn’t kept up when it’s risen.

We think this fund uses a solid process and will do well over the long run. That said, we currently have other Asian funds that use a similar process and have performed well on the Wealth Shortlist. Investors should also note this fund is invested quite differently from the broader market and its peers, partly due to its investments in Japanese companies and lower exposure to large Chinese tech firms. This means performance will also be different at times. As always, there are no guarantees how the fund will perform in future. The fund can fall as well as rise in value so investors could get back less.

Past performance is not a guide to the future. Source: Lipper IM to 31/08/2021

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