Lincoln Far East Trust
Lincoln Far East Trust is a conservative offering, but we believe it is well worth owning for the right investor.
The resulting portfolio displays a strong value bias relative to its Morningstar category peers and the benchmark. The value discipline and emphasis on controlling for fundamental risks drive the exposures. Most notably, the fund has large underweights in India and China, and has cut back sharply on materials since 2005 based largely on a lack of attractively valued opportunities and concerns about corporate governance. On the flip side, the team has favoured the dividend-rich telecoms, utility, and financials sectors.
This positioning has badly hurt the fund's returns in recent years, as Asia has until recently been led by pricey shares in China and India and expensive resources issues. However, investors need to keep these poor recent results in context. First, the fund is notably lower risk than its rivals or the benchmark (although like all offerings focused on equities in the region, it cannot be thought of as low-risk in an absolute sense). The standard deviation of this fund over three and five years to June 2008 is 14.8 and 13.4 respectively. This is notably lower than that of the Morningstar category, 20.1 and 18, and the MSCI Asia Pacific Ex-Japan index, 19.5 and 16.9. Its performance in 2008 is a case in point: Whilst the fund has lost 13.7% for the year to date through 22 July, that's much better than the category average loss of 22.2%. Second, the fund has performed well when it should. From 2001 through 2004, largely a value-led environment, it beat its average category peer by an average of nearly nine percentage points per annum. On that basis, despite weakness in recent years past, its 10-year record ranks in the category's top quartile.
This fund's consistently applied strategy, experienced management, and focus on the long-term all argue strongly in its favour. One negative is the recent decision to increase the annual management charge to 1.5% from 1.25%, which will boost its TER from 1.35% to something north of 1.50%. That's too bad: Low costs can give a fund a big edge over time. Even so, the fund is not expensive relative to its peers, and for investors who value long-term strength and lower volatility over sizzle, we think it's a strong choice. Those who want a fund with the flexibility to chase shorter-term trends should look elsewhere.
