Stewart Investors Asia Pacific Leaders Sustainability: September 2022 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 also invests more in Japan than its benchmark and many other Asia Pacific funds, which makes it different. The fund could be used for broad exposure to Asia or 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 funds.

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 several other funds, including the Indian Subcontinent Sustainability Fund. Every fund at Stewart Investors has a co- and deputy manager to provide adequate support. Sashi Reddy, another experienced member of the team, is this fund’s co-manager.

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.

Process

Stewart Investors and its fund managers have based their approach on the same investment philosophy that dates back to 1988. The philosophy is founded on stewardship, and the team invests investors' money 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 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 47.4% of the fund is currently invested. This is a significant amount and means the fund is likely to benefit when the Indian market is performing well, but it could hamper returns when the market goes through a setback. Some 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.

Gait is more cautious in his outlook for China, believing there’s increased political risk there compared with other countries. This means 6.3% of the fund currently invests in Chinese companies compared with 30.1% for the Asian market. The manager 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 10.5%) 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. To invest more in Japan and provide additional flexibility, the fund is in the IA Specialist sector.

The manager invests in companies for the long term, so he doesn’t make many changes to the fund from year to year. Over the past year shares in Malaysia’s Public Bank were added to the fund. He thinks it’s a well-capitalised bank with a strong financial track record. Elsewhere, he sold investments in Indian healthcare business Biocon, Taiwanese tech business MediaTek, and the Bank of the Philippine Islands.

Culture

We think the culture and philosophy that has evolved at this investment 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.

Stewart Investors has been home to two teams that work closely together – Sustainable Funds Group (SFG) and St Andrews Partners (SAP). The SFG team manages this fund, and it was recently announced that the SAP team will close. This will have no operational impact on the remaining SFG team, though there will be a loss of some experienced investors from the wider group, and it’s a change we will continue to monitor. The SFG team will take over a couple of emerging markets funds from SAP, as these are focused on areas they know well. The remaining funds are being closed.

ESG integration

Stewardship and sustainability form a core part of the team’s investment strategy, and it's become an increasingly important part of the process over the years. Gait and the team focus on companies they believe could benefit from and contribute to the sustainable development of the countries they're based in. Analysing environmental, social and governance (ESG) information helps them understand more about the quality of companies, and they think their long-term investment horizon makes sustainability even more important.

The team likes to actively engage with businesses as they believe this can enhance returns and reduce risk. For example, they engage with companies to reduce plastic waste. To help achieve this, they have previously commissioned research on plastic waste in consumer goods companies and part-funded the operational costs of a sustainability charity to develop an India Plastics Pact.

Companies have since significantly increased post-consumer waste collection and their use of recycled and recyclable plastics in their packaging. The team continues to encourage ambitious targets and greater participation in the India Plastics Pact.

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 performed better than the broader Asia Pacific stock market. As always, past performance isn't a guide to future returns.

Over the year to the end of August 2022, the Asian stock market has lost 3.36%*. This is partly due to weakness in the Chinese market, which makes up a large part of the broader Asian market. The fund has held up slightly better over this time and fallen 2.82%. India has been one of the strongest performing Asian markets over this time, while China has been weaker. This has helped the fund’s performance as it has a bias to India, but less invested in China. The manager’s individual stock picks have also performed well.

On the other hand, so far this year the fund has missed out on gains made in extractive industries such as mining and oil & gas, as it doesn’t invest much in these areas.

Over the longer term, 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 that could 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 than they invest”.

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2022

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