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Neil Shillito – “Investing in Asia is a long-term strategic imperative, not a short-term tactical gambit”

Fund Manager
3 January 2018

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Asia (ex Japan) is the fastest-growing region in the world, representing one-third of global GDP and more than half of the world’s annual growth. Some investors have viewed the region with some caution for a variety of reasons, including lack of corporate governance, risk, compliance standards and a general lack of familiarity with the region.

In the past, the arguments in favour of investing in Asia have included portfolio diversification, a tactical addition or an emerging markets play. In our opinion, none of these present a compelling strategic case for long-term commitment to the region.

Asia in statistics:

  • According to the International Monetary Fund (IMF), China became the world’s largest economy in 2014 - the only country to beat the US since 1872.
  • 85% of South Korea’s population are internet users. The country currently has the fastest average internet connection speeds in the world.
  • From 2009 to 2016, the number of mobile phone subscribers in Bangladesh grew to 131 million from 45.21 million. Bangladesh has a population of around 165 million people.

These statistics highlight the extraordinary pace of modernisation and economic growth that has taken place in Asia over the past 20 years. Markets across the region have been transformed by rising personal wealth and consumption, combined with gradual economic liberalisation and technology adoption.

However, we believe that investors should not consider investing in Asia merely as a ‘growth play’ since GDP growth alone is not a reliable indicator of higher equity valuations. Indeed, the two can be negatively correlated - it is possible to experience weak economic growth while the stock market is booming. We believe productivity is key to higher equity values and drives investment, economic growth and prosperity.

Over the past 20 years, Asia has experienced extraordinary economic and stock market growth, driven by rising levels of productivity, and can therefore offer exciting global investment opportunities. As a result, we view investment in Asia not as a simple ‘add on’, but as a core strategic portfolio allocation.

There is a relationship between productivity and equity valuations in Asia. Productivity increases have a tangible impact on the price-to-earnings ratio, an important driver of equity returns. The relationship is reciprocal – increased equity valuations increase productivity. The effects of such increases are permanent: we believe the number of mobile phone subscribers in Bangladesh will continue to increase, as will the percentage of internet users in South Korea.

Undoubtedly, there will be periods of volatility but this can aim to be compensated by long-term risk-adjusted returns. We believe good manager selection is the best way for investors to profit from the rapidly expanding Asian market.

A key holding in the Downing Diversified Global Managers (DDGM) portfolio is the Alquity Asia Fund, managed by Mike Sell. Alquity Asia is equity focussed, targeting attractive risk- adjusted returns over the long term by investing in public companies across the continent (ex Japan). The portfolio is unconstrained and focuses on long-term themes, transparency and alignment of management. This is achieved through the manager’s investment process, which incorporates financial valuations in addition to the environmental, social and governance analysis of material non-financial factors.

We believe it is a ‘special’ fund – indeed, since DDGM invested in the fund as at June 2016, Alquity Asia has generated a 30.1% return as of 30st November 2017* for DDGM.

*Please note, past performance is not a reliable indicator of future results.

Neil Shillito

Fund Manager, Downing Diversified Global Managers Fund

December 2017

This article is for information purposes, should not be regarded as investment or taxation advice and no reliance should be placed upon it. Capital is at risk. The value of investments and any income derived from may go down as well as up and investors may not get back the full amount invested. Any personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation. Past performance is not a reliable indicator of future results. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is authorised and regulated by the Financial Conduct Authority (Firm Registration No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London, EC3R 6HD.

 

Mathews Asia: The Case For Asia,

Mathews Asia: The Case For Asia,

JP Morgan, ‘The Case for Asia Rising Productivity, Higher Valuations and the Strategic Imperative for Investors’, May 2012

 

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