“Lifestyle upgrades, demographic shifts and financial deepening across Asia are creating a wide range of long-term investment opportunities — and that story remains firmly intact,” Joanna Kwok, co-manager of the $467m JP Morgan Asia Growth Fund, told FSA in an interview.
The fund has made some tactical moves, such as buying “Chinese software companies which should benefit from people spending more time at home”, but her confidence in the region’s potential is undimmed.
Kwok highlighted how Asia’s share of the MSCI AC World index has surged over the past 20 years to 16% from 5% in 1999, driven by both issuance volumes and outperformance.
Meanwhile, the region’s share of revenues rose to 30% from 4%, and its share of net profits increased to 33% from 3%, citing MSCI data.
“Asia has actually de-rated compared with the rest of the world, given that its share of market has not kept pace,” said Kwok.
“Over the next generation, opportunities for investors will be driven by yet more transformational earnings growth and by valuations that more fully reflect the positive change,” she added.
So far, Kwok’s conviction and strategy have been vindicated.
The Asia Growth fund, which was authorised by the China Securities Regulatory Commission for sale in the mainland, has generated a three-year cumulative return of 49.18%, almost double the performance of its benchmark MSCI AC Asia ex-Japan index (25.11%), and three-and-a-half times the sector average (13.98%), according to FE Fundinfo data.
Its annualised volatility of 16.56% is higher than both (15.26% and 13.52% respectively), but Kowk and co-manager Mark Davids have earned alpha of 8.68 during the same period, and the fund’s risk-adjusted return as measured by 0.66 Sharpe ratio is much higher than than the index (0.30) and its peers (0.09), according to FE Fundinfo.
A panel of fund selectors named it the best Asia Pacific Equity product in the recent FSA Awards 2020 (Hong Kong).
Active selection
The fund has notable active bets against its benchmark MSCI AC Asia Pacific ex-Japan index at the country and sector level. It is overweight China, Hong Kong and, especially India, and underweight Korea and Taiwan. Unsurprisingly for a growth-oriented fund, its sector tilts are towards information technology, consumer discretionary, communication services and healthcare, and away from old industries, such as energy, materials utilities.
“In the consumer space, growing affluence is resulting in ‘premiumisation’, or the shift to higher-quality goods and services,”
In Vietnam and China, for instance, dairy companies are expanding by offering premium products to richer consumers, and the region has many companies leading innovation in areas such as networking, electric vehicles, artificial intelligence and factory automation.
However, its biggest overweight of 7.5% is to the financials sector, because “as regional economies develop, financial services companies are benefiting from growing demand for savings products, pension plans and healthcare insurance,” said Kwok.
JP Morgan Asia Growth Fund allocation vs benchmark MSCI AC Asia ex-Japan index
Country:
| Country |
Fund |
Index |
Relative weighting |
| China |
41.8% |
40.2% |
+1.6% |
| India |
14.6% |
10.6% |
+4.0% |
| Taiwan |
11.8% |
13.7% |
-1.9% |
| Hong Kong |
11.1% |
9.8% |
+1.3% |
| Korea |
10.9% |
13.7% |
-2.8% |
Source: Fund factsheet (31 January 2020); MSCI
Sector:
| Sector |
Fund |
Index |
Relative weighting |
| Financials |
30.2% |
22.7% |
+7.5% |
| IT |
20.3% |
18.9% |
+1.4% |
| Consumer discretionary |
19.1% |
14.9% |
+4.2% |
| Communication Services |
12.4% |
12.0% |
+0.4% |
|
Industrials |
5.7% | 6.6% |
-0.9% |
| Healthcare |
4.0% |
3.1% |
+0.9% |
| Consumer staples |
3.9% |
5.2% |
-1.3% |
| Property |
2.5% |
5.5% |
-3.0% |
| Materials |
– |
4.2% |
-4.2% |
| Energy |
– |
3.8% |
-3.8% |
| Utilities |
– |
3.1% |
-3.1% |
Source: Fund factsheet (31 January 2020); MSCI
“Nevertheless, stock selection, not country or sector allocation, is the main feature of our growth strategy and is how the portfolio derives most of its performance,” said Kwok.
“It is key not only in the vast China stock-universe of A-shares as well as H-shares and ADRs, but also in Hong Kong, Korea and Taiwan. Country sub-fund managers and sector specialists provide stock recommendations, but ultimately the decision and responsibility lies with me,” she added.
Kwok and the fund’s other co-manager look for opportunities in profitable companies with strong balance sheets, that offer sustainable returns and growth prospect, as well as satisfying governance and other risk criteria including ESG.
Although the fund is market-cap agnostic, it mostly comprised of large cap stocks. Indeed, its top-ten holdings are similar to those in many other Asia-focused funds, and include the familiar Alibaba, Taiwan Semiconductor Manufacturing, Samsung Electronics, Tencent and AIA among its top five.
“Over time we might move into more smaller-cap stocks, but valuations and opportunities are most appealing in the bigger names,” said Kwok, who also manages the JP Morgan Asian Smaller Companies Fund.
Kwok recognises that the coronavirus outbreak and reactions to it raise near-term risks to her fund, but retains her confidence in the structural transformations in the region that shape her strategy.
Other fund managers, such as Newton Investment Management, have emphasised a similar conviction, and have vowed to ride out any temporary market volatility.
“Further policy stimulus measures might prompt a rally in low quality, cyclical stocks which have underperformed the type of high quality, growth stocks we prefer. At the other extreme, if the economy slows significantly and the markets fall precipitously with no early containment of the virus, then quality-growth stocks are likely to drop most because they are more widely held,” she said.
“But, whatever the short-term anxieties, the positive secular trends remain solid,” she stressed.
JP Morgan Asia Growth Fund vs MSCI Asia ex-Japan index and sector average
