Equities – Quiet confidence begins to surface in Asian funds

Who would have thought 18 months ago that Asian funds would be the market’s peak performers? Samantha Walker takes a look at how the funds are capitalising on the mopping up operation currently underway in the region.

"With the current economic turnaround, the intrinsic reasons why Asia was an exciting place for the past 10 or so years have returned."

So says BT portfolio manger Christopher Ong. And well he might, considering that he is responsible for BT's Select Markets Pacific Basin Fund, the largest Australian-based managed fund in the region, which has posted six month returns of 28 per cent.

Ong's views are shared across the board by long-suffering fund managers who are finally reaping rewards after two years of an Asian recession so deep that many thought it might lead to a depression.

BT's Select Markets Pacific Basin Fund has certainly felt the brunt of the economic slump. Just before the crisis hit in July 1997, the fund's assets were valued at about $883 million. This March, even after the recent strong returns of the fund, its assets were only $317 million.

Other funds in the region fared just as badly. HSBC's FlexiTrust Dragon fund, weighing in at $121 million when the crisis hit in 1997, but is now worth about $49 million. Its returns, though, have also turned around - in the past six months it has returned about 21 per cent to its investors.

Likewise, though the Fidelity Perpetual SE Asia fund and the Jardine Fleming Taipan Fund have posted six month returns of 33 per cent and 19 per cent respectively, Fidelity Perpetual's fund has almost halved in size since March 1997. Jardine Fleming's Taipan Fund, worth $99 million in March 1997 is now worth just over a fifth of those levels.

So are these increases in returns a sign of a recovery in Asia? And if so, will this recovery continue?

Ong is cautiously optimistic about recent gains in Asia and argues that, though markets in the region are not booming, they are recovering.

He also argues that a surge in Asian economic growth is not necessary for improved investment performance in the region.

"Corporate profitability is the key and you don't need to see a huge growth in the economy to increase corporate profitability," he says.

Ong argues recent corporate restructures in both Japan and south east Asia will substantially improve profits this year in the corporate sector. And this, coupled with the easing of foreign ownership restrictions in Asia, presents an opportunity for investors looking for value.

"In 1998, in the depths of the crisis, prices of Asian stocks had corrected to the levels they were 15 to 20 years before," he says.

Ong says the BT Select Markets Pacific Basin fund is investing in Asia on a company by company basis, though he believes some sectors remain more attractive at this point in time.

"Telecommunications companies are now cheaper in the Asian market than they are anywhere else in the world," he says. "We also like companies in the electronics sector, and PC companies."

Buoyed by recent increases in consumer spending, Ong is also looking at food, tobacco and brewery stocks throughout the region.

As far as countries go, BT's fund is weighted in favour of Korea.

"Korea is one market we are very positive about. Companies there were the messiest and were over-leveraged, but now we see this situation is improving."

He is also keeping his eye on Thailand, Singapore, Hong Kong and the Philippines.

The Fidelity Perpetual SE Asia fund is also continuing to approach the region on a company by company basis.

Glen Howard, portfolio manager for international funds at Perpetual Investments, says the fund invests in companies with high quality management, in line with Fidelity's bottom-up stock selection investment approach.

"We are only choosing to invest in companies where earnings growth is predictable, which was very difficult to do at the crisis' low point," he says. "We are looking for companies that have a strong position within their industry."

Fidelity's analysts currently find technology, electrical and utility stocks to be the strongest performers, as are Hong Kong property stocks. The fund has also increased its weighting in Korea.

However, Howard is keen to point out that the fund does not target any specific sector. He also argues that while we will see continued recovery in Asia, this will not happen at the rate seen in the last quarter of 1998.

"When the sentiment did turn around, you saw markets bounce back ahead of

the fundamentals and earnings growth of companies," he says. "In this sense, the market did go ahead of itself a little bit."

Howard also says company culture in Japan and south east Asia is the key to a full economic recovery in the region, and that restructuring will need to happen.

In the meantime, Howard says the Fidelity Perpetual SE Asia fund is underweight in commodity and raw materials, and is currently concentrating on some of the larger cap stocks available in Asia.

HSBC Asset Management's chief investment officer for Asia Pacific, Ian Burden, says the dramatic increase in returns for HSBC's FlexiTrust Dragon fund indicates that the economic woes of Asia have bottomed out. Burden argues that the recession, which left Asian markets "flat out on their backs" in late 1997, is improving as Asian markets take their lead from Japan.

"Obviously Japan is the 800 pound gorilla on the block", he says, adding that improvements in this market have flowed on to south east Asian markets.

Burden also singles out Korea as one of the healthier options available to investors.

"The Korean market has gone up 27 per cent in dollar terms in recent months, although we feel the market would be healthier if the gains were more modest," he says. Burden also likes Singapore and Taiwan, "on a selective basis", and is buoyed by recent improvements in the current accounts of Thailand.

With improved market sentiments in Asia, fund inflows have picked up, though most managers agree there is a long way to go.

"Although markets have gone up quite a bit in value, people are still assessing the region, although we've generally seen more positive flows into funds," Burden says.

This view is echoed by other fund managers investing in the region, who are cautiously optimistic that inflows will continue to rise alongside markets in the region.

"What you have to keep in mind," Howard says, "is that investment in Asia is good for the long-term, and investors should not invest in this region for anything less than two or three years, just as for any other equity fund. The recovery process in under way, though a full recovery won't take place until late 1999, early 2000, at the earliest."