Pictet, which has total Asia ex-Japan assets under management of $1bn, views the region as an “inefficient market” caused by investors’ myopic behaviour and “their focus on earnings, which can be manipulated, instead of cash, which is real”.
She said that the firm’s Asian Equities ex-Japan Fund’s stock-picking strategy focuses on cashflow and return on invested capital rather than earnings.
“We believe a company should be valued on its ability to generate and sustain strong cash and cash returns.”
The portfolio managers have identified opportunities in non-bank financials in China and among financial stocks elsewhere in the region, including in India, Indonesia, Taiwan and Thailand.
Among the top ten holdings of the firm’s flagship $420m Asia ex-Japan Fund are insurers AIA and Ping An, Indonesia’s Bank Rakyat and Bank Negara, India’s HDFC Bank, and Chailease Holding, a Taiwan leasing company.
Pictet Asia ex-Japan Fund portfolio breakdown
The fund has been managed by Avo Ora since 2011, and he is helped by James Kennedy and Prashant Kothari, who joined him at Pictet in London at around the same time.
It has achieved a 40.75% cumulative return during the past eight years, outperforming its benchmark MSCI Asia ex-Japan index (33.0%) and the sector average (17.41%), while also enjoying less volatility. However, its return is well-shy of Asia ex-Japan funds managed by Pinebridge, First State, Templeton, Schroders and Fidelity which have all posted returns of more than 60% during that period.
Nevertheless, the fund has regularly outperformed its index (35.36%), earning a 40.25% cumulative return over three-years, and also ahead of its sector average, despite a below-par calendar year 2018, when it came unstuck “holding a few wrong stocks in the wrong sectors”, said Nandra.
These included a steel company hit by external sanctions, a healthcare firm caught up in a regulatory issue and a Chinese auto joint venture that was hurt by new domestic restrictions.
But typically, “the managers will retain individual stocks as long as the original investment thesis is intact”, said Nandra.
“We try to capture opportunities across two broad areas,” she said.
“These are ‘structural growth’ companies that can sustain above average returns and companies that are going through an ‘inflection’, where the market wrongly extrapolates temporarily depressed returns into the future.”
Detailed discounted cash flow analysis is central to the process, as are internal ESG assessments, she added.
“We always incorporate governance in our company due diligence and analysis, and often require evidence of improvement in corporate standards,” said Nandra.
The firm has a five-stage stock- selection process that reduces an investible universe of about 1,200 stocks, with a minimum market cap of $500m, to a final selection of between 50 and 70 stocks that are held in the portfolio for an average of three years.
“The choices are 40% based on valuation, 40% on historical and expected returns, and 20% based on momentum, which is evenly split between price and earnings momentum,” said Nandra.
The main risk to the valuation-sensitive strategy occurs when markets are bearish, as they were last year.
“The fund tends to underperform when investors rush to safety,” she said.
Pictet Asian Equities ex-Japan Fund comparative data
8-year cumulative return
|Pictet Asian Equities ex-Japan Fund|
|MSCI Asia ex-Japan index|
Source: FE Analytics. Data in US dollars: 27 May 2011 (appointment of Avo Ora as fund manager) – 28 May 2019. *SFC and/MAS authorised.
Pictet Asian Equities ex-Japan Fund vs MSCI Asia ex-Japan index and sector average, 3 YR