Melchior Asian Opportunities Fund research update

Richard Troue | Fri 06 March 2015

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Many commentators have speculated that China's economy is due a significant slowdown, but it has not materialised. The authorities appear to be managing the transition from a manufacturing-led to consumption-based economy well. Growth has slowed from the double-digit level of a few years ago to around 7% a year, which is perceived to be healthy and sustainable.

Henrietta Luk, manager of the Melchior Asian Opportunities Fund, is currently positive on the outlook for the Chinese property market. As the Chinese authorities have kept interest rates relatively low consumers have had access to credit, maintaining demand for property.

One of the beneficiaries of this could be China Overseas Land, according to the manager. It is one of the largest property developers in China, with a robust balance sheet which has stood it in good stead as rivals have struggled. Henrietta Luk believes it will capitalise on further strength in the property market.

Elsewhere, the manager is also positive on technology companies, particularly those supplying components for smartphones and tablet computers. This market is going from strength to strength, as Apple's recent results show. The iPhone 6 and 6 Plus are selling well, while the Apple Watch and new iPad, both due for release soon, could boost sales further.

Many of the components for these types of device are made in Taiwan. Henrietta Luk has invested in Largan Precision Co, which manufactures camera lens modules for these devices, and Catcher Technology, which makes the aluminium and magnesium housing cases, in the expectation they will benefit from increasing tablet and smartphone sales globally.

A further important long-term theme in Asia is rising household wealth and disposable incomes, which could benefit a range of consumer-focused companies. Two Korean consumer companies Henrietta Luk is particularly positive on include AmorePacific, and LG Household and Healthcare. Both sell cosmetics and are extremely popular in Asia, especially among the younger generation who view Japanese cosmetics as out of fashion. Both companies announced strong sales growth recently. AmorePacific saw its China sales grow 51% year-on-year in the third quarter of 2014, for example.

In contrast, the manager is less positive on the luxury goods sector, particularly in Hong Kong and China where sales are falling. An investment in Prada was sold from the fund over concerns sales in the region were set to fall, for example. The fund operates a concentrated portfolio which allows each holding to make a significant impact on returns, but this is a higher risk approach.

Our view on this fund

This fund had a difficult time during the financial crisis, but has since recovered reasonably well, rising 52.7% over the past five years compared with 37.3% for the average fund in the IA Asia Pacific ex. Japan sector and 42.9% for the MSCI AC Far East ex. Japan Index*. Please remember past performance is not a guide to the future and this is a higher risk investment area.

Past performance is not a guide to future returns. Source: Lipper IM* to 02/03/2015

We removed this adventurous fund from the Wealth 150 in October 2011 as performance had been inconsistent and our analysis suggested the manager's stock selection was not adding value. There has been an improvement in both performance and stock selection recently, but we would like to see this sustained for longer before reconsidering the fund for inclusion on the Wealth 150 list of our favourite funds across the major sectors.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.