Threadneedle Asia
Threadneedle Asia is a solid way to play the region but investors shouldn’t necessarily expect a repeat of its heroics of the past few years.
Donegan's management of the fund conforms to the Threadneedle blueprint of taking obligatory 3% over or underweight positions in the 20 largest stocks in the fund’s MSCI Asia Pacific ex Japan index. That may not sound like a huge constraint, as only BHP Billiton and China Mobile currently exceed 3% of the benchmark, but the fund is over a quarter (25.76% at 09/08) invested in the index’s top 20 companies, which is within Donegan’s expected 20-30% range. These holdings are then complemented by ideas from the “preferred list” which includes the team’s best research ideas and together must make up a minimum of 60% of the portfolio. This forms the fund’s core.
To select her weights in the core and to construct the rest of the portfolio, Donegan starts by identifying broad investment themes she thinks will drive growth. Current themes include infrastructure spending and domestic consumption in China. She mixes these top-down macro views with bottom-up fundamental research in a flexible manner which emphasises different factors depending on the manager's view on the stock, region or industry in question. However, Donegan tends to keep the fund's sector bets moderate relative to its benchmark and also spreads its assets across roughly 100 holdings.
Donegan got in early on the China and commodities rally and the fund outperformed by a wide margin in 2006 and 2007. But that isn't the norm: In keeping with Donegan's relatively constrained approach, the fund produced more sedate benchmark-plus returns with a low tracking error before 2006. It's also worth noting that the fund has slightly underperformed its peers and the index as China has slumped in 2008, and it has been somewhat more volatile than its peers and the benchmark under Donegan.
This fund features a knowledgeable manager with an approach that should limit major deviations from the benchmark and still offer a good chance for decent outperformance. That said, we also believe the constraints in the process don’t take full advantage of Donegan’s experience. For investors seeking a dependable workhorse, it's a sound choice. But those after the potential for greater outperformance will want to look elsewhere.
