Many of these companies are in the consumer industry, including the apparel, footwear, electronics and restaurant sectors, according to Mehta.
“The internet has forced well-established firms to adapt as consumers changed their buying habits. Efficient online service became paramount as new entrants challenged their market position,” he said.
“We decided in Q3 last year to embrace the disruption story more fully and that is reflected in our portfolio allocations.”
Major holdings include Chinese sportswear provider Li-Ning, South Korean high-end cosmetics firm L&G Household and Healthcare, Indian footwear manufacturer Bata, and Jollibee, a Philippines-based fast-food chain.
“The common theme is that their original business models have been disrupted by the internet, and they have responded by re-focusing their distribution online,” said Mehta.
He is also attracted by data companies, such as Tata Consultancy and Reliance Industries in India, which have played catch-up with US firms that were quicker to exploit the advantages of cloud technologies.
Perhaps more controversially – although also more honestly than some fund managers – Mehta understands the regional and cultural nuances of ESG.
“The family firm structure is common in Asia, so investors should not be dogmatic about a minimum quota of independent directors. The dominance of family members on the board is not a signal of poor governance,” he said.
Mehta’s fund also holds Gudang Garam, Indonesia’s second-largest cigarette maker, and India’s ITC, which earns 52% of its revenues from tobacco sales.
“Tobacco taxes make up a significant part of several governments’ revenue. In Indonesia, for instance, it is as much as 8%, yet around 65% of cigarettes in the country are smuggled in from neighbouring countries,” he said.
The inference is that demand for tobacco will be met by even more illicit supplies if domestically-produced cigarettes are taxed too highly — and that government revenues will be depleted.
The tightly focused-nature of the stock selection strategy means that the portfolio diverges substantially from its benchmark.
“We run an 83% active share portfolio,” said Mehta.
The disparity is also evident in fund’s country and sector allocations. It has a 15% over-weight position in India, and is significantly under-weight China and South Korea. It has outsized bets to the consumer staple and discretionary sectors and is under-weight financials and other cyclical industries.
In fact, one reason for the fund’s poor performance last year was its 23% exposure to cyclical stocks, according to Mehta.
“China policy measures in late 2017, such as closing excess industrial capacity and reducing corporate debt levels, seemed positive for the Chinese economy and for cyclical sectors, including banks,” he said.
“However, the economy slowed and confidence was further dented by the trade dispute with the US which set off in April 2018.”
“Our top-down analysis was wrong,” he admitted.
The fund has a three-year cumulative return of 13.97%, significantly underperforming both its benchmark, the MSCI Asia ex-Japan index (45.76%), and its sector average (31.64%). Last calendar year, its NAV fell 22.82%, compared with declines of 14.67% and 15.62% for the index and sector respectively.
Mehta also conceded that a couple of stock-picks turned out badly too.
PCJ, an India jeweller, was accused by the authorities of alleged tax evasion through its export business, “but we had been focussed too much on its thriving domestic operations and failed to spot discrepancies in its overseas sales,” said Mehta.
Meanwhile, a holding in Hanssesn, a South Korean furniture designer, took a hit when its stores were boycotted by customers angered by an alleged case of sexual harassment at the company.
The fund subsequently sold both stocks, as it switched to its current disruption-focussed strategy.
Major country and sector divergence from index weightings
Top 10 holdings:
JOHCM Asia Ex Japan Japan Fund vs MSCI Asia ex-Japan index and Sector average