Aberdeen Asia Pacific & Japan
Aberdeen Asia Pacific & Japan is a solid choice for Asian equity exposure.
The team approaches stock selection from the bottom up, focusing on firms with strong free cash flows, solid balance sheets, and quality management teams. Once a stock passes the quality screen, the team examine its value relative to its market price and to the valuations of similar companies within a relevant universe. The latter criterion gives the fund a strong value cast.
The team shows admirable conviction in their strategy. They allow their bottom-up stock selection process to dictate the look of the portfolio, and they pay little attention to benchmarks or peers. As a result, this portfolio differs substantially from the typical fund in the Morningstar Asia Pacific with Japan category. For example it has a notable overweight in Singapore, where it holds around three times the category average. Here the team favour international operators like Singapore Telecom (the firm's revenues predominantly come from Australia and Emerging Asia). They also like the fact that the firm has strong balance sheets and good management but can still be had for a reasonable price.
The team’s strategy has also led to prominent underweights. For example, the portfolio has been underweight China for around five years now due to poor corporate governance and a lack of transparency. Over this period, the MSCI China index returned 39% a year on average, putting stocks further out of reach on valuation grounds. The fund has also been underweight the strongly performing industrial materials sector (which includes metals and mining companies) relative to its peers. Again this is due to lofty valuations after the price of materials companies grew rapidly following burgeoning demand for commodities. The team stuck to their strategy and maintained these underweights even as China and materials stocks rallied strongly. Those decisions cost the fund in 2006 and 2007, but that’s the kind of conviction and discipline that we like to see in an investment manager.
Moreover, the China stance has paid off handsomely thus far in 2008 as the market has dropped sharply. In all, over the past five years, a period where China and materials stocks have put up impressive returns, this fund has managed to beat its category peers by almost 5% per annum. A big plus has been the team’s light weight in poorly performing Japanese equities. The fund has only a 25% exposure to Japan compared to peers who have nearer 50%. Aberdeen’s downbeat view on Japan is further highlighted by the fact that the Japanese companies it does own tend to be large multinationals like Toyota and Honda or Cannon who derive a large part of their income from outside the country. The underweight is the result of the bottom up approach and helps to highlight the strength of the team's stock picking abilities.
In short, there’s a lot to like here. This fund boasts a strong record, a sensible strategy, and a seasoned and disciplined management team. It’s a strong choice for investors seeking diversified exposure to Asia.
