FSSA Asia Focus: February 2021 fund update

Kate Marshall | Tue 02 March 2021

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• This fund is run by a manager and team with a great pedigree of investing in Asia
• We like the culture and philosophy at First Sentier – the managers view themselves as stewards of investors' capital, looking after it as though it's their own
• Martin Lau has an impressive track record of investing in some of the region's best-performing companies over the long run
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

Long-term growth is the main aim of this fund, and the investment approach means we expect some more stability in returns compared with others in the Asia sector. The fund could fit with other Asian funds that use a different or more adventurous investment approach, or form part of a broader global portfolio with a long-term outlook. It invests in higher-risk emerging Asian countries, such as China, India and Taiwan, as well as more developed Asian economies, including Singapore and Hong Kong.

Manager

Martin Lau is the lead manager of this fund. He is a highly regarded Asian fund manager and has invested in the region for more than two decades. In that time, he's managed several funds that invest broadly across Asia, including this one, as well as those that focus specifically on China, an area he specialises in. Since joining First Sentier Investments in 2002, he has built one of the most impressive track records investing in these markets.

Lau is a modest fund manager and open about both what has worked well and what hasn't in his funds. These are qualities we like. While we rate him highly, he isn't a one-man band. He's got a good-quality team of investors around him, who all follow the same investment philosophy and provide each other with important challenge before stocks make it into their portfolios. Some team members are also portfolio managers with good track records in their own right.

Process

Martin Lau and his team look for quality companies they can invest in for the long term. They like those with a competitive advantage that others struggle to replicate, such as a well-known brand or the ability to raise prices for their products without affecting demand from customers. They should have the potential to grow earnings sustainably over the long run, and be run by reputable management teams that don't take unnecessary risks in the pursuit of short-term gains. Overall, the team is made up of conservative investors, looking after clients' money as if it's their own.

At the moment the fund mainly focuses on sectors that could benefit from rising consumer spending, such as technology, financials, and companies that produce consumer staples such as food and beverages. India and Hong Kong in particular are two places where the manager finds some of the highest-quality companies, but he finds good investment opportunities across the entire region.

As a long-term investor, Lau doesn’t change too much in the fund from year to year. He often sells shares in companies that have performed well and could have less room to grow in future, and buys more shares in companies that have been weaker, but still have growth potential. Last year he added to Indian stocks, including some banks, as well as a Korean cosmetics company.

The manager also added an investment in Chinese internet firm Alibaba. In the past he had some concerns over the way the business was run and its structure. But he and his team have spent a lot of time analysing the company over the years, and he feels some of these problems have more recently been addressed. He took the opportunity to buy the stock during a period of market volatility last year.

Culture

We like the culture and philosophy that's been cultivated at First State Stewart Asia (FSSA, part of the broader First Sentier Investments group). Their philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and engage with companies to make sure they're run in a way that'll benefit all shareholders.

Companies must also consider environmental, social and governance (ESG) factors, and the team won’t invest in tobacco, gambling, or weapons manufacturers. While they can invest in any other sector, companies should cause little, if any, harm to the environment around them or the labour they employ, for example. Over time this has become an increasingly important part of the team's investment process. If they don't think a business meets these standards or is doing enough to address a problem, then they won't invest.

FSSA also places emphasis on recruiting and maintaining great people. Every manager and analyst advocate the team's overriding philosophy. At the same time, their individual personalities are allowed to shine, and they're encouraged to bring their own ideas to the table.

Lau is a Managing Partner of FSSA, so we think he's incentivised to ensure the business, including its funds and people, are successful. He looks after its team of analysts and fund managers, which means he can pass on his knowledge and experience. It also means he has additional responsibilities, but we're confident he spends most of his time focused on looking after his clients' money.

First Sentier Investments was acquired by Mitsubishi UFJ, a Japanese bank, in 2019. Takeovers can sometimes lead to disruption and corporate change, though positively FSSA remains an independent investment team. That said, we will continue to look out for potential further change.

Cost

This fund has an ongoing annual charge of 0.90%, but we've secured HL clients an ongoing saving of 0.15%. This means you pay a net ongoing charge of 0.75% and makes the fund one of the lowest-cost funds available in the Asia Pacific ex Japan sector through HL. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Lau has built an excellent long-term track record. The FSSA Asia Focus Fund launched in 2015 and has since performed much better than the average fund in IA Asia Pacific ex Japan sector. Other funds Lau has run over longer periods have also performed well. Our research shows he's achieved this by focusing on the prospects of individual companies, rather than taking a view of the wider economic environment. Past performance isn't a guide to future returns though, and all investments fall as well as rise in value so you could get back less than you invest.

Lau and his team are conservative in the way they manage money and aim to limit losses in a falling market. They invest in companies they think will see consistent demand for their products or services and prosper over the long term, rather than chasing short-term fads. It means the fund has tended to hold up relatively well when markets have been rocky, but has lagged behind when they’ve risen strongly.

The fund has performed that way over the past year and is in line with our expectations. While it’s delivered an impressive return of 23.2%*, this is slightly behind the 27.0% for the sector average. The fund doesn’t have as much exposure to some of the higher-growth tech and internet companies that drove much of the market performance last year. In the team’s view, some of these companies haven’t, or won’t, make consistent enough profits to be considered for the fund. They prefer to invest in companies they believe could grow earnings at a steadier pace, with associated share price growth.

Other tech companies in the fund have performed well, including TSMC (Taiwan Semiconductor Manufacturing), and Korea’s Samsung Electronics and Naver, which offers a variety of online services.

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2021.

Find out more about FSSA Asia Focus, including charges

FSSA Asia Focus Key investor information