Stewart Investors Asia Pacific Leaders: August 2020 fund update

Kate Marshall | Fri 28 August 2020

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• David Gait is a highly experienced fund manager in Asian equities
• We like his focus on stewardship, sustainability and high-quality companies
• He has a good long-term track record, though performance has been more muted against the benchmark in recent years
• This fund is not on our Wealth Shortlist. You can find the funds chosen by our analysts for their long-term performance potential here

How it fits in a portfolio

This fund aims to provide long-term growth by investing across Asia Pacific markets, including India and Taiwan. Its greater exposure to Japan differentiates the fund from many other Asia Pacific funds. We think the fund could be used to provide key exposure to Asia, and provides a way to diversify a global investment portfolio. Exposure to emerging markets adds risk and the associated volatility should be taken into account when constructing a long-term portfolio.

Manager

David Gait is a long-standing member of Stewart Investors' Asian equities team. He joined the team in 1997, and has been fundamental in helping to evolve the group's Asian investment strategies.

Gait took over management of the Asia Pacific Leaders Fund in 2016. He's also managed the Asia Pacific Sustainability Fund since 2005 and the Pacific Assets Trust since 2010, which both use a similar investment process. These three funds are his main responsibility, though his experience and longevity at Stewart Investors means Gait is co-manager or deputy manager of a number of other funds, including the Indian Subcontinent Sustainability Fund. Every fund at Stewart Investors has a co- and deputy manager to provide adequate support.

On this fund Gait also has the backing of other respected fund managers and a close-knit team of analysts. Some of these team members manage other funds with good track records in their own right.

Gait was previously a Managing Partner of Stewart Investors, but he recently handed over this role, along with other business management responsibilities, to experienced colleagues. This is part of the manager's longer-term planning, so he can dedicate his time to company research, fund management, and mentoring junior members of the team.

Process

Stewart Investors and its fund managers have based their approach on the same investment philosophy that dates back to 1988. The philosophy is founded on stewardship, and the team invests investors' capital as though it's their own. They aim to grow investors' wealth over the long term, while limiting losses when markets fall.

In this fund Gait invests in quality companies he believes can deliver sustainable and predictable growth over the long term. He likes cash-generative businesses, which are in good financial health and could withstand periods of economic volatility. The manager also puts emphasis on businesses’ people and culture, and only invests in companies he believes are run by management teams with integrity.

Gait focuses on sectors that are typically more defensive, which means they're expected to hold up a bit better when markets are weaker. This includes the consumer staples and healthcare sectors, which tend to sell products and services that people often continue to buy, regardless of what's going on in the wider economy.

In terms of countries, the manager currently finds some of the most attractive long-term opportunities in places such as India and Taiwan. The fund also has more invested in Japan (currently 16.5%) than most Asia Pacific funds.

Funds in the IA Asia Pacific ex Japan sector can invest up to 5% in Japanese companies. However, over the years Gait has found an increasing number of high-quality companies that are located in Japan, but carry out most of their business within Asia, particularly China. To invest more in Japan and provide additional flexibility, the fund is in the IA Specialist sector. Current Japanese holdings include consumer goods businesses Unicharm and Pigeon, medical technology firm Hoya and paint manufacturer Nippon Paint.

Culture

Stewardship and sustainability forms a core part of this fund's investment strategy, and it's become an increasingly important part of the process over the years. Gait focuses on companies he believes could benefit from and contribute to the sustainable development of the countries they're based in. Analysing environmental, social and governance information helps the manager understand more about the quality of companies, and he thinks a long-term investment horizon makes sustainability even more important.

We think the culture and philosophy that has evolved at the group over the years is attractive. The team doesn't put personal gain ahead of its investors, and looks for companies that treat their customers in a similar way.

Stewart Investors forms part of First State Investments, which was acquired by Mitsubishi UFJ, a Japanese bank, in 2019. Takeovers can sometimes lead to disruption and corporate change, and there has since been some change within the team, though positively Stewart Investors remains an independent investment team. That said, we will continue to look out for potential further change.

Cost

This fund has an ongoing annual fund charge of 0.89%, but a discount of 0.05% is available for HL investors, which reduces the charge to 0.84%. This is reasonable compared with other Asia funds. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. Investing through HL, a platform fee of up to 0.45% a year also applies.

Performance

This fund hasn't performed as well as the broader Asian stock market since Gait took it over in 2016*. He has a good longer-term track record though. Taking his fund management career as a whole, which includes the Asia Pacific Sustainability Fund that he's run since 2005, he has outperformed the market. As always, past performance isn't a guide to future returns.

Given the manager's focus on quality companies and a more conservative investment style, the fund has tended to hold up better when the Asian stock market falls, but hasn’t kept up when it rose. It's been a similar story so far this year, and the fund has held up relatively well during the volatility caused by the coronavirus crisis.

In particular, the fund's investments in Japanese companies held up well during the market setback earlier this year, and so did exposure to the healthcare sector through companies such as Australia's CSL and India's Dr. Reddy's Laboratories. Investments in Taiwanese companies have also proved relatively resilient. In a recent meeting with Gait, he noted the country is home to many conservative companies with good cash flows.

We think this fund will do well over the long run. That said, we currently favour other Asian funds that use a similar process and have performed better in recent years. Investors should also note this fund is invested quite differently from the broader market and its peers, partly due to its investments in Japanese companies and lower exposure to large Chinese tech firms. This means performance will also be different at times. As always, there are no guarantees how the fund will perform in future. The fund can fall as well as rise in value so investors could get back less than they invest.

Past performance is not a guide to the future Source: *Lipper IM to 31/07/2020.

Find out more about Stewart Investors Asia Pacific Leaders including charges

Stewart Investors Asia Pacific Leaders Key Investor Information