Equities in Asia-Pacific are expected to become more attractive. The US dollar has weakened and risk appetite appears to be reviving after the US Federal Reserve maintained its dovish tilt on monetary policy direction and reduced the number of interest rate hikes expected for this year.
Removing interest rate risk from the near horizon is likely to provide further support for Asia Pacific equities. In ASEAN, for instance, it gives countries room to cut their real interest rates to spark economic growth. Stronger ASEAN currencies versus the US dollar supports domestic consumer confidence and is positive for foreign investment.
But Asia-Pacific is a broad category and it’s important to differentiate among the markets. China’s slowing growth, RMB currency movements and increasing mainland credit risk remain big concerns and are causing volatility in regional stocks markets.
Hence, the selection of stocks is likely to play a key role in generating alpha.
Against this backdrop, Fund Selector Asia compares two equity funds in the region — the Fidelity Pacific Fund and the GAM Star Asia Pacific Equity Fund.
Luke Ng, FE Advisory’s senior vice president of research, provides a comparative analysis.
Investment Strategy
The Fidelity and the GAM fund are domiciled in Luxembourg and Ireland, respectively, Ng said.
They both invest in Asia-Pacific, including Japan, but use different benchmarks. The Fidelity fund uses the MSCI AC Pacific Index and the GAM fund uses the MSCI Pacific Index. Both indices include the five major developed markets in the region, namely Australia, Hong Kong, Japan, New Zealand and Singapore.
However, Ng noted some key differences. Fidelity’s benchmark index includes seven emerging markets in Asia, namely China, Indonesia, South Korea, Malaysia, the Philippines, Taiwan and Thailand.
“The Fidelity fund has broader exposure as it includes the emerging Asian equities,” he told FSA.
The GAM benchmark has a high exposure to Japan, which is reflected in the GAM fund’s outsized weighting in Japan equities.
Fidelity’s product has a strong focus on small- and mid-cap stocks and it had a diversified portfolio of about 200 stocks as of the end of April.
“The fund tends to invest in companies that have good long-term growth prospects, the ability to generate cash and strong management teams,” he said.
In terms of sector preference, Ng said the fund has a strong focus on consumer discretionary and technology companies, which present significant growth opportunities. But the fund does not particularly favour financial stocks.
Turning to the GAM product, it has an allocation similar to its benchmark index, which has a core focus on the developed markets, such as Japan, Australia, Hong Kong and Singapore, Ng said.
“At the same time, the team looks for investment opportunities in China.”
Overall, the GAM fund has a stronger focus on old-economy stocks, such as the financial and industrial sectors, he said, adding that it has over 50% exposure to Japanese stocks.
Sector comparison:
| Fidelity | % | GAM | % |
| Consumer Products | 26.90 | Financials | 35.81 |
| Telecom, Media & Technology | 24.00 | Industrials | 21.83 |
| Financials | 20.90 | Consumer Products | 18.88 |
| Industrials | 11.70 | Telecom, Media & Technology | 13.18 |
| Basic Materials | 7.90 | Others | 6.24 |
| Healthcare | 5.60 | Healthcare | 4.06 |
| Utilities | 2.70 | ||
| Money Market | 0.30 |
Region Comparison:
| Fidelity | % | GAM | % |
| Pacific Basin | 48.00 | Japan | 59.81 |
| Japan | 27.60 | Australasia | 17.71 |
| Australasia | 7.90 | Hong Kong | 11.70 |
| Hong Kong | 7.10 | Pacific Basin | 5.87 |
| International | 4.70 | International | 4.91 |
| Asia Pacific | 4.40 | ||
| Money Market | 0.30 |
Sources: FE Analytics; firms’ factsheet
Performance
The Fidelity fund has outperformed the GAM fund over the past one, three and five years in dollar terms as of the end of April, he said.
FE gives the Fidelity fund a four crown rating and the GAM fund gets three crowns, indicating that the Fidelity fund has generated a better risk-return profile in terms of alpha, volatility and consistency over the past three years, Ng said.
“The Fidelity fund has benefited from stronger stock selection, as it tends to pick stocks that are undervalued and with some unique characteristics, such as having an innovative business model, or those that benefit from various industry trends, such as a rosy outlook on the tourism industry, or the sharp increase in wealth accumulation of the middle classes in some parts of the region.
“In contrast, the GAM fund has a strong focus on traditional old-economy stocks, which have been out of favour, and this has affected its overall performance,” he said.
Fidelity versus GAM over the last three years
To eliminate currency risks, the two funds are compared using the dollar as the currency base.
Source: FE Analytics
