Invesco Asian fund’s primary objective is to produce capital growth from predominantly large and mid-sized companies listed in Asia (ex Japan) and Australasia. It is not benchmark constrained and aims to significantly outperform the market over 3-5 year rolling periods by targeting double digit annualised returns from every investment.
William Lam was appointed sole manager of the fund from May 2017, having been involved with the strategy since 2006. He became co-manager with Stuart Parks in 2015, as part of succession planning for the veteran Park’s retirement.
Lam is supported by three other fund managers and two analysts plus two product directors. The team typically makes around 15 trips to Asia each year and conducts 500-1000 company meetings. Companies also visit their Henley offices and regular updates are conducted by conference calls.
Last year, the Asian and Emerging Market desks were merged and Will Lam is now co-head of the enlarged team.
Investment philosophy & process
Lam believes that company share prices ultimately reflect earnings progression but, over time, can deviate significantly from their intrinsic value for a variety of reasons. This presents opportunities to invest at attractive prices during periods when sentiment is poor, although a long-term mind-set is required.
Valuation is at the heart of the strategy and companies must trade at a substantial discount to Lam’s estimate of fair value, to offer the desired upside potential. This includes growth stocks which may have had a setback and fallen temporarily out of favour. Alternatively, an emerging source of growth may not be fully appreciated.
The fund will also look at businesses with modest prospects where overly-negative sentiment gives the potential for positive earnings surprises. The team takes a contrarian approach, often searching for ideas in unloved areas of the market where Lam believes there is a catalyst for change. Furthermore, he will only buy businesses that he truly understands.
Although fundamental analysis of companies is key, the team considers the wider political and economic situation. To form a macro view they use a variety of sources including: broker and industry research, in-house specialists and media reports. Close attention is paid to the position in the economic cycle, structural trends and sustainability of growth. This helps build conviction at a country and sector level.
The strategy drives them towards core themes which currently represent: the Chinese consumer, South Korea, undervalued balance sheets (a lot of cash gives scope to buy competitors or pay special dividends) and commodity related cyclicals. These may be at different stages of maturity and Lam adjusts the portfolio to incorporate new themes when they arise.
The 10,000 stock universe is filtered down to 1,000 by market size (above $500m), liquidity and ESG criteria. Debate amongst the team produces a shortlist of 100 companies which captures their preferred themes, taking into account earnings growth, competitive position, management quality and governance.
From this list, Lam builds a diversified portfolio of 50-70 companies. He assesses the potential returns from earnings, dividends and re-rating over a 3 year period to identify the best which are constantly monitored. Lam sets a target price and will take profits when it is reached.
Performance & charges
Over 10 years, the fund has delivered a total return of 237.8% against 176.1% for the MSCI AC Asia Pacific ex Japan index and 170.6% for the Investment Association Asia Pacific Excluding Japan sector, in sterling. During his tenure (since 30/4/2015) Lam has also significantly outperformed, with a total return of 60.9% compared to 38.1% for the benchmark and 41.0% for the IA peer group.
However, the past 18 months have proved more difficult, and the fund has lagged its benchmark as large positions in South Korea and Taiwan, notably Samsung and Taiwan Semiconductors, have been hurt by the trade tensions between China and the US.
Chinese internet companies also underperformed on concerns over a slowdown in consumer spending and increasing competition. However, holdings in selected Indian financials, including ICICI Bank and HDFC Bank, did well following Prime Minister Modi’s re-election.
We consider the Ongoing Charges Figure of 0.9% is reasonable for the region, which requires a significant resource commitment.
Economic growth has slowed as renewed trade conflicts are having a negative impact on exports. Consensus earnings growth estimates for Asia in 2019 have been reduced, to around 4.5%, and Lam considers the next 2 years are also vulnerable to downgrades.
However, a softer policy stance from central banks and the Chinese government seeking to stabilise growth with further stimulus, has led to a rebound in Asian stock markets. Against this background, the team are cautious on some PE (Price to Earnings) valuations in the near term.
Nevertheless, the region is expected to remain the biggest driver of global growth. Furthermore, there are signs of better capital discipline, with strong balance sheets, low debt and improving free cash-flows. Consequently, Asia is not expensive relative to its history on a number of metrics including price to book value, dividend yield and debt ratios.
Lam believes the market is over-pessimistic on South Korea which is home to high quality companies. There is scope to enhance shareholder returns, as the government and the National Pension Service exert pressure to raise governance standards. Similarly in Taiwan, holdings have been hurt by trade disruption and weaker smartphone demand, yet cash flows remain strong. Both countries will be helped by innovation and their competitive advantage.
The portfolio is currently spread across a number of countries, with 30% in Hong Kong & China, 20% in South Korea and 13% in Taiwan. Biggest sector positions are currently 27% in Financials and 21% in Information Technology.
The portfolio has significant exposure to leading South Korean and Taiwanese technology companies. Lam has added to Samsung which has committed to maintain or grow the dividend in 2019 and 2020 and return cash to shareholders.
Taiwanese chip designer Mediatek is a potential beneficiary of supply chains moving their manufacturing base out of China to avoid tariffs. Many Chinese internet companies had a poor 2018 and are now back on the radar. JD.com (which follows the Amazon model) and Baidu are such companies which have experienced setbacks and are held.
Lam believes the plunge in automotive related sales in China will be temporary and has bought into Autohome (an e-commerce platform similar to Autotrader in the UK) and Dongfeng Motor, a Chinese motor manufacturer. Another recent purchase is Singaporean Jardine Cycle & Carriage, an auto retailer and distributor in Southeast Asia. Lam believes it has an attractive valuation with good earnings growth potential and a focus on long-term shareholder value creation.
The long-term outperformance of this fund is particularly creditable considering value styles have been out of favour for a lengthy period. Lam’s reputation as an up-and-coming manager in this well-established Asia team is evident with him being handed this flagship fund. The team may be smaller than some competitors but the resources of Invesco means they receive the research budget they need.
Lam adheres to a clearly defined process with a track record of strong outperformance, although this is no guide to the future. He may sometimes buy too early but has an exit price in mind and is always ready to lock in some profits and recycle cash into the next opportunity.
As this focused approach deviates significantly from the benchmark, there can be extended periods when the fund under or out-performs. Therefore, it is best suited to investors with a long timeframe who can withstand volatility. The reasons for a poor outcome in 2018, when defensives were clear winners, are understandable and the strategy should be well-placed if a US-China trade agreement is struck.
Important information: Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this article is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment.
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