Investing in Asean Equities could offer great potential for professional investors. The area has emerged as a core asset with superior long-term growth characteristics. We wanted to analyse some of the top funds to invest in Asean Equities, and look at the strategies that the fund managers are following to achieve great returns for their clients.
We have analysed 3 funds from JP Morgan, Fidelity and Barings, taking in consideration the Morningstar data for 5 year returns to look at the best option when investing in Asean Equities.
Source: Morningstar 18/08/2021
JP Morgan Funds – ASEAN Equity Fund
Pauline Ng, Portfolio Manager, J.P. Morgan Asean Fund
Investment narratives over the last five to seven years have firmly centered around growth and quality investment styles/factors, with value and most commodities underperforming. Technology disruption, digital economy, green technologies are among the most talked-about mega-trends. Tencent was the first internet stock to be included into MSCI China 13 years ago – accounting for less than 2% of the index at that time. Today, about half of MSCI China is made up of new-economy companies. Since the inclusion of Tencent, MSCI China has returned 117% (6% compound annual growth rate, or CAGR), while MSCI Asean has returned 47% (3% CAGR) – due in part to the growth in these new-economy listings.
We believe this disparity is about to change in the economies of the ten-member Association of Southeast Asian Nations (Asean) region. When we talk about ASEAN we refer to the set of countries belonging to the Southeast Asia region, such as Indonesia, Malaysia or Philippines. The main characteristic of this region is that its population is young (average age is just 30 years old) and they are interested on the internet and new technologies. According to a Google, Temasek and Bain & Company research report, the number of internet users in Asean has seen explosive growth, with 40 million added in 2020. While Wall Street has largely ignored the equities market in Asean, as evidenced by over US$50 billion of foreign outflows since the first mention of quantitative-easing tapering in 2013, main street investors have been capitalizing on these digitally innovative opportunities.
Private capital investment has led to a mushrooming of new-economy businesses in Asean. We believe that some of these new economy businesses in Asean have the potential to generate healthy growth over the next decade and beyond. For example, E-commerce penetration in Asean is still in the single digits, compared with almost 25% for China already. Covid-19 has fuelled the take-off, while strong government push from several of the nations in Asean is supportive and will be integral to scaling it higher. It is projected that the Asean internet economy will triple to US$300 billion by 2025, according to Google, Temasek and Bain & Company. Digital payment revolution is also awakening to transform the region into the next bright spot.
But it´s important that old-economy companies turn disruption into opportunities. In Asean, where three out of every four adults are either unbanked or underbanked, one of the structural growth drivers is the rise in financial penetration. Decarbonization is another key theme for the next decade. As countries move from pledges to action, green capex will and must accelerate.
This is a fact to consider to Asean too, which has three broad categories based on carbon transition investment opportunities: Utility companies that are proactive in shifting their energy generation mix to renewables; Technology companies with core competencies that benefit from rising electric-vehicle/clean-energy adoption; and Globally competitive providers of raw materials for green capex. In conclusion, Asean’s structural merits (favourable demographics and growing domestic consumption) have not translated fully into stock market performance of late, as some of the fastest-growing businesses were not listed. Those facts means that Asean equities as an investment class can no longer be ignored.
Fidelity Funds – ASEAN Fund
Madeleine Kuang, Fund Manager Fidelity Funds – Asean Fund
Strategy: Madeleine employs a fundamental, bottom-up driven investment approach, driven by stock selection and industry analysis. Her investment process focuses on identifying mispricing opportunities with attractive risk-reward profiles. She believes outperformance can be driven by superior earnings growth and/or market recognition and subsequent closure of gap between stock price and intrinsic value. She also believes under-researched companies can offer the highest upside potential for valuation anomalies. She focuses on the most attractive mispricing opportunities where the potential total returns (capital appreciation plus dividend yield) on offer are the highest in the market and are weighted against the downside risk. She favours companies that are mispriced relative to their intrinsic value. Ultimately, sector and country allocation will largely be driven by bottom-up stock selection process.
As per August 2021, Equities in the Association of South East Asian Nations (ASEAN) slid in July. High COVID-19 cases in the region and the spread of the more contagious Delta variant of COVID-19 globally, raised concerns over a delay in the economic recovery. Sentiment across global equity markets was subdued due to the increased risk aversion, which weighed on the ASEAN market as well. From a country perspective, Malaysian, Indonesian and Thai equities slid due to elevated daily COVID-19 case counts despite stringent lockdowns.
Thailand’s finance ministry lowered its 2021 economic growth forecast for the third time this year, as the tourism-dependent region battles its biggest COVID-19 outbreak to date. A pickup in Delta variant infections in the country and the slow pace of vaccinations weighed on the Philippines market. On a positive note, Singapore equities were supported by gains in the real estate and industrial sectors. The country’s economy grew at the fastest rate in 11 years in the second quarter of 2021 on a year-on-year basis, according to advance estimates. In this environment all the sectors except communication services edged lower. Energy, consumer discretionary and industrials were among the key laggards.
The fund returned -2.1%, while the index returned -3.4% in July. Listing gains from the participation in the initial public offering (IPO) of CTOS Digital contributed to performance. The Malaysian credit reporting firm likely has first mover advantage of data quality, stickiness of customers and consolidated industry competition. In addition, the outlook is encouraging in light of its expansion in product offerings and customer reach, as well as potential acquisitions within Malaysia and throughout the ASEAN region. SEA Ltd gained momentum in light of its positive growth prospects stemming from strong traction in the digital entertainment and e-commerce space. Investors favoured Rajthanee Hospital and Metrodata Electronics for their healthy growth outlook.
The former is supported by its plans to increase capacity by opting for a mass, low-cost field-hospital model, while the latter is likely to benefit from its digital banking initiative as well as potential mergers & acquisitions. Conversely, garments manufacturer Crystal International was caught in weak capital market sentiment in China. Nonetheless, the manager remains optimistic about its long-term prospects. The Philippines-based airline Cebu Air fell out of favour due to a pick-up in COVID-19 infections in the country and elsewhere in South East Asia, raising concerns over a delay in the economic reopening.
The manager favours businesses that are enduring franchises with sustainable competitive advantages; a reasonable runway of future growth; have attractive valuations with a good risk/reward profile; solid balance sheets; and management with integrity and superior capital management ability. The manager prefers certain core compounders. Bank Central Asia is held for its best-in-class deposit franchise and strong digital channel.
The lender’s efficient management of funding costs, low credit risk, solid underwriting discipline, strong capital position and improving asset quality trends holds it in good stead. Convenience chain store operator CP All remains a key overweight position at very attractive valuations. It has a dominant franchise in the Thai grocery market, despite near-term growth pressure on its 7-11 convenience business. SEA Ltd is a beneficiary of the shift to online lifestyles and structural trends such as an expansion in the mobile gaming segment, as well as rising e-commerce and fintech penetration in the South East Asia region.
The manager has chosen opportunities in certain mispriced names such as CapitaLand. Its recently announced restructuring plan should help to unlock value from its platform and lodging business, while reducing shareholders’ exposure to its development business, which bears higher regulatory risks and increasingly lower returns from residential development. Palm oil producer Wilmar is held as it has a thriving consumer staples blended business and an attractive plantation profile. Its growth prospects are further enhanced by the increase in crude palm oil prices and its focus on environmental, social and corporate governance issues.
Barings International Umbrella Fund – Barings ASEAN
SooHai Lim, CFA, Calista Lee, Rainy Zhang, CFA Portfolio Managers Barings Asean
The objective of the Fund is to achieve long-term capital growth in the value of assets by investing in companies in Asia which the Managers believe will benefit from the economic growth and development of the region.
The Fund will seek to achieve its investment objective by investing at least 70% of its total assets at any one time in equities and equity-related securities of companies incorporated in countries which are members of the Association of South-East Asian Nations (ASEAN), or which have a significant proportion of their assets or other interests in those countries. The members of ASEAN include Singapore, Thailand, the Philippines, Malaysia, Indonesia and Vietnam.
Market Opportunity: One of the largest funds in this asset class, with a strong long-term track record. The emerging countries of Asia – favourable demographics together with significant underpenetration of goods and services. Long-term growth from infrastructure build-out and accelerating consumption trajectory. Investment process tailored for asset class by experienced team.
If you are interested in other articles about Equity Funds, check them here.