A Harder Slog Through Asia

02/10/2010 12:01 am EST

Focus: GLOBAL

Andrew McHattie

Editor, Investment Trust Newsletter

These two London trusts have the hot hand in the region, and one of them has anticipated a tough 2010, writes Andrew McHattie in the Investment Trust Newsletter.

Asia is a popular choice for investors now; hence, the [modest] average discount in [this UK-listed trust] sector. The two stars of the sector for the moment are Fidelity Asian Values (LSE: FAS) and Scottish Oriental Smaller Companies (LSE: SST).

Fidelity Asian Values has grown its assets by 93% over the last year, and is ranked second in the sector over one, three, and five years. Managed now by John Lo, the trust was launched in 1996 and invests in the stock markets of the major [Asian] economies, such as China, Hong Kong, Taiwan, Korea, and Singapore, as well as the less developed markets of Malaysia, Thailand, and Indonesia. This trust does not invest in Japan.

The focus is on large and medium-sized companies where there is good information available about corporate strategy, management capability, and business risks. The portfolio manager employs a fundamental bottom-up approach based upon independent proprietary research with active country and sector allocation being a result of stock selection. Notably, companies with entrenched market positions are favored, where strength and management quality of the company are exhibited in the ability to grow market share while maintaining pricing power.

Scottish Oriental is the only trust to have outperformed Fidelity Asian Values in the sector. It is ranked first over one, three, and five years, which is a credit to the manager Susie Rippingall of First State Investments. She has managed the £140m trust since 2000, and is based in Hong Kong.

The trust’s remit is to achieve long-term capital growth by investing mainly in smaller Asian-quoted companies with market capitalizations under US$1 billion at the time of investment, or the equivalent. The highest country weightings at the end of December were in Singapore (14.4%), South Korea (12.3%), Thailand (10.5%), and Hong Kong (10.4%). By sector, the highest weightings are in consumer discretionary (23.2%), financials (20.2%), and information technology (12.9%).

We understand the argument for investing in smaller companies in a growth region, and the trust’s record is obviously exemplary, but the managers do not seem to be at all complacent. Indeed their outlook for 2010 suggests a volatile year ahead.

The trust says, “Asian stock markets are likely to be volatile in 2010, responding to changes in expectations for economic growth in both the region and worldwide. The relatively weak recovery in Europe and the US could limit demand for Asia’s exports, particularly manufactured consumer goods, forcing the authorities to keep their currencies competitive.

“The outlook for corporate earnings is also uncertain, with most forecasts erring on the side of optimism. The strong appreciation in Asian smaller companies means that the majority are now fairly valued. The failure of companies to meet expectations could result in a sharp correction. Scottish Oriental’s focus on well-managed, soundly financed companies with strong business franchises should provide some defense in what is expected to be a highly challenging year.”

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