Mutual Fund Commentary
A HIGHLY RANKED ASIAN EQUITY FUND
Japan is seeking to recover from its latest recession, causing investors to search for investment alternatives. Yet, Pacific ex-Japan equity markets tend to be more volatile, as these largely emerging markets are prone to favorable and unfavorable geopolitical developments and unexpected events, such as natural disasters. Steve Cao, lead portfolio manager of S&P Capital IQ four-star Invesco Asia Pacific Growth (ASIAX 33 ****), views the volatility in Asia as an opportunity to buy high-quality companies with long-term earnings power at an appealing valuation.
Cao and his two co-managers Mark Jason and Brent Bates, employ a low turnover, bottom-up process based on finding companies they think have sustainable earnings growth and efficient capital allocations. Ideal companies have global franchises, earnings growth catalysts and proven a management team that have established strong balance sheets. Fund management has a list of ideal candidates that is regularly monitored until valuation opportunities arise. Stocks are selected with a long-term investment horizon of generally two to three years, though Cao highlighted to S&P Capital IQ in a mid-November interview that a number of its holdings have been in the portfolio for close to a decade. However, positions will be trimmed or eliminated when the valuation no longer seems appealing.
ASIAX has an S&P Capital IQ four star ranking, based on a combination of its strong risk-adjusted track record, its underlying holdings and its cost factors.
As of November 21, the fund's three-year annualized total return of 14.0% was stronger than its Pacific ex-Japan peer average of 12.1%. This top-quartile peer group was achieved with a standard deviation of 10.4 that was 21% below that of its peer group, contributing to an above average Sharpe ratio of 1.13 (0.74 for peers). In each of the last three calendar years, the fund outperformed its peer group and is up 9.6% for the year to date, ahead of its 8.4% average.
The fund had 15% of its assets in cash as of the end of September, though Cao said it declined to 9% as of mid-November. Cao mentioned that country allocations to Australia (as of September 2014, comprised 10% of assets), China (19%), Hong Kong (12%) and Singapore (8%) have moved higher. During the last 12 months, only three new stocks were added to the approximately 50-stock portfolio while stakes increased in others.
One such new addition to the portfolio was Australian based Amcor ltd (AMC), a global packaging solutions company with subsidiaries covering Asia, Europe and the United States. Cao mentioned the company's strong global franchise in food and tobacco packaging and its 30% return on equity as examples of the attributes that Invesco favors in its search for high quality companies. AMC, which has an S&P Capital IQ Fair Value ranking of 3, sports a hefty 4.5% dividend yield.
Another new addition was SM Prime Holdings (SMPH), which has an above-average S&P Capital IQ Quality Ranking of A-. The Filipino Real Estate Investment Trust (REITs) has a 1.5% dividend yield. ASIAX has a 2.9% dividend yield that is higher than the 2.3% peer average.
Other recent holdings with above-average S&P Capital IQ Quality Rankings include Minth Group (00425) and Industrial & Commercial Bank of China (1398), with A+ and A- rankings, respectively.
Further helping the fund's ranking is a turnover rate of just 18%, well below its peer average's 55%. In addition, the expense ratio of 1.5% is modestly below the 1.6% for peers. For investors seeking exposure to high-quality Asian equities, we think ASIAX is a strong candidate for their portfolio.