Asia Pacific Leaders Fund First

¶ … Asia Pacific Leaders Fund

First State Asia Pacific Leaders states that the investment objectives that their company focuses on are those in which long-term capital growth is achieved. The Fund invests in "large and mid capitalization equities in the Asia Pacific region" however, excluding Japan and including Australia. (Trustnet, 2009) It was reported May 30th 2007 that the managers of funds investing in the Pacific and South East Asia "delivered outstanding performance in the six months to the end of March 2007" but that they had shifted toward a cautious outlook "seeking a variety of risks despite healthy fundamentals. The question addressed in this study is just how cautious is this Fund and how well does this cautious investing pay off?

Recent Performance of the Fund

In April 2009 it is reported in the work of Grote entitled: "Hold of Fold? First State Asia Pacific Leaders Fund" that it was stated that First State Asia Pacific Leaders fund "sit at the top of its sector over long time periods. Over three years and five years it ranks second in the Asia Pacific excluding Japan sector with returns of 28.9% and a whopping 99.8% respectively." (Grote, 2009) Grote states that performance has, in recent months "...tailed off slightly as Tulloch failed to capture as much of the upturn in Asian markets as many of his rivals. It lost 1.2% over three months to the end of March, causing it to plummet towards the bottom of the sector to reach a ranking of 58 out of 73 over the period. And despite returning 8.6% in March, it continued to drop down the rankings to 63 out of 75 as others in the sector gained more exposure to the upturn in markets. Henderson's Asia Pacific Capital Growth fund, for example, returned almost double that with 16.4% in March." (Grote, 2009)

Tulloch is stated to be, while downgraded to a single Citywire A rating this month, sticking to his strategy arguing that the rally is likely to be short-lived." (Grote, 2009) Tulloch is noted as having stated: "We are wary of the current rally as we believe the global economic and political outlook is likely to deteriorate significantly before it starts to improve. In terms of investment allocation we see no point in being especially adventurous at this time. We will remain focused, even more than usual, on non-cyclical sectors such as consumer staples, telecoms and utilities. There may well come a time later this year when we shall add to our few "cyclical growth" holdings but only if share prices fall much lower than current levels." (Grote, 2009)

II. Structure of Fund is Umbrella Company

The First State Asia Pacific Leaders Fund company is stated to be structured "as an umbrella company" and comprised of the sub-funds as follows:

(1) First State Asia Pacific Fund;

(2) First State Asia Pacific Leaders Fund;

(3) First State Asia Pacific Sustainability Fund;

(4) First State Asian Property Securities Fund

(5) First State Global Agribusiness Fund

(6) First State Global Emerging Markets Fund

(7) First State Global Emerging Markets Leaders Fund

(8) First State Global Emerging Markets Sustainability Fund

(9) First State Global Growth Fund

(10) First State Global Listed Infrastructure Fund

(11) First State Global Opportunities Fund

(12) First State Global Property Securities Fund

(13) First State Global Resources Fund

(14) First State Greater China Growth Fund

(15) First State Indian Subcontinent Fund; and (16) First State Latin America Fund

III. 2009 Fund Activities

According to the 2009 Managers report the following information has been recently made available on the management of First State Asia Pacific Leaders Fund: (1) Global equities decline on profit taking after a strong run; (2) Asia Pacific ex-Japan markets fell but outperformed; (3) Thailand produced strong returns as the political situation stabilized; (4) Taiwan, India and South Korea underperformed; (5) Kasikornbank (Thailand: Financials) gained as investors sought the attractive valuations offered by the Thai market; (6) Australian gold miners Newcrest Mining and Lihir Gold declined with the price of Gold; (7) We bought Link REIT (Financials) Hong Kong largest owner of retail property with significant and underestimated revenue potential; (8) We sold China Resources Power (Utilities) as we believe it is vulnerable should interest rates begin to rise; (9) We continue to retain a very conservative stance seeing little upside at current valuations; and (10) Markets are discounting a rapid return to the pre-crisis conditions of strong economic growth but not the possibility of higher inflation. (First State Investments, 2009) The following fund information is also stated in the same report.

Figure 1

Fund Information Manager's Report (2009) First State Asia Pacific Leaders Fund

Source: First State Investments (2009)

The sector breakdown for First State Asia Pacific Leader Fund is shown in the following chart.

Figure 2

First State Asia Pacific Leaders Fund (2009) Sector Breakdown

Source: Source: First State Investments (2009)

The regional breakdown for First State Asia Pacific Leaders Fund is show in the following chart labeled Figure 3 in this study.

Figure 3

First State Asia Pacific Leaders Fund -- Regional Breakdown

Region

Percentage

Greater China

38.3%

Australasia

25.1%

South East Asia

16.4%

Indian Subcontinent

7.6%

Korea

6.9%

Cash

5.6%

Source: First State Investments (2009)

IV. Fund Dominates Investor Choice in this Sector

The work entitled: "First State Asia Pacific Leaders Fund Leads the Pack" published by the Investors Chronicle reports: "As positive sentiment mounts around the prospects for Asia in a post-credit crunch world, investor interest in Asia Pacific (ex Japan) funds continues to gain momentum." (Investors Chronicle, 2009) It is stated that according to recent figures "released by Cofunds, the UK's biggest investment platform, confirms a significant rise in the net sales of funds focused on investment opportunities in this region." (Investors Chronicle, 2009) According to business development manager at Cofunds, Michelle Woodburn, "if there is one fund which dominates investor choice in this sector, it is the First State Asia Pacific Leaders Fund." (Investors Chronicle, 2009)

Woodburn goes on to state "First State's offering continues to dominate within the emerging markets arena, with flows into the Asia Pacific Leaders fund increasing significantly in the second quarter of this year - placing it among the top 10 funds in terms of net sales." (Investors Chronicle, 2009) It is stated that the fund has as its aims achieving long-term capital growth through investment in "large and mid-cap equities in the Asia Pacific region, including Australasia" and that this fund "lagged the recent bounce in markets, however, Alstair Thompson, manager of the fund since its December 1993 launch holds that the fund "will always tail sharp bounces due to its investment focus" and specifically stated by Thompson is "We invest with absolute return mindset which means that our interpretation of avoiding risk is not to lose clients' money and not being overweight or underweight in any index or benchmark..." (Investors Chronicle, 2009)

It is reported that the two managers are "bottom up investors" who are in search of "good quality companies, while retaining an awareness of macro economic factors." (Investors Chronicle, 2009) Thompson additionally is reported as having stated that "there is not a whole lot of new buy ideas emerging..." referring to the "fund's favored stocks which are reaching fair value and will be sold into strength." (Investors Chronicle, 2009) The following charts have been adapted from the Investors Chronicle report on First State Asia Pacific Leaders reporting the funds performance:

The work of Grote (2009) states that First State is "...highly respected for its expertise in Asian markets. The fund manager's style is very much individual. He generally ignores the benchmark, believing it to be a poor representation of available market opportunities. This is borne out by the fund's relatively high tracking error. He also tends to be slightly defensively biased, focusing on the downside as well as the upside. As the name of the fund suggests, it is biased towards large cap stocks, and First State focuses on companies with lower gearing and strong cash flows." (Grote, 2009) Both the defensive approach and the ignoring of the benchmark are stated to have "served the firm well in relative terms in the past two years." (Grote, 2009)

Grote states that the fund lost approximately 14% since November 2007 in the beginning of the credit crunch impact on the Asian markets and the sector loss is stated at 31%. This is stated to be in part due to "an underweight position in Ch9ina and a more defensive stock selection." (Grote, 2009) The fund is stated to have "outperformed in good times as well as bad, beating the sector in four of the past five discrete years. It has a low beta, and a high alpha. These numbers, together with the consistent outperformance and high tracking error, point to a skilful fund manager. (Grote, 2009)

V. Passive vs. Active Management of the Funds

Passive management while working well in the UK and U.S. And even the western European markets does not work so well in area such as Asia and Grote states that "it is more important to have a good active manager. There are additional considerations, such as political risk and accounting standards." (Grote, 2009) According to Grote (2009) the fund "has proven to be a consistent performer." The following chart labeled Figure 4 in this study lists the performance indicators for the First State Asia Pacific Leaders Fund (2009).

Figure 4

First State Asia Pacific Leaders Fund Performance

FIRST STATE ASIA PACIFIC LEADERS

PRICE

SHARPE RATIO

0.03

SIZE OF FUND

£2,527m

1-YR PERFORMANCE

7.63%

No OF HOLDINGS

43

3-YR PERFORMANCE

53.24%

SET UP DATE

01-Dec-03

5-YR PERFORMANCE

MANAGER START DATE

01-Dec-03

TOTAL EXPENSE RATIO

1.57%*

BETA

0.59

YIELD

1.57

VOLATILITY

4.11

MINIMUM INVESTMENT

£1,000

TRACKING ERROR

3.2

MORE DETAILS

www.firststate.co.uk

Source: Investors Chronicle

Figure 5

First State Asia Pacific Leaders Top 10 Holdings

Holding

Percentage

Newcrest Mining

8.7%

Swire Pacific

5.7%

Brambles

5.6%

Taiwan Semiconductor

5.3%

Hong Kong & China Gas

4.9%

Cheun Kong Holdings

4.8%

Oversea-Chinese Banking Corp

4.2%

Lihir Gold

3.2%

Chunghwa Telecom

3.0%

Woodside Petroleum

2.9%

Source: Investors Chronicle

As shown in the previous figure the top ten holdings of the First State Asia Pacific Fund are those of Newcrest Mining, Swire Pacific, Brambles, Taiwan Semiconductor, Hong Kong & China Gas, Cheung Kong Holdings, Oversea-Chinese Banking Corporation, CSL, Chunghwa Telecom, and Hong Lung Group, with percentage holdings ranging from 9.0 to 2.9% respectively.

VI. Fund not for Risk-Taking Investor Expecting a Quick and Large Return

Grote (2009) states of the First State Asia Pacific Leaders Fund that if one believes that Asia "...is about to enter a thundering bull market again in the short-term, this fund is probably not for you. But if you think Asia is less affected than the rest of the developed world by events of the past 12 months or so, and you believe the region offers potential to return more than the UK, Europe or the U.S. As we emerge from the mess we are in, then the First State Asia Pacific Leaders fund should be on your short list." What the investor will have will not be "stellar returns" however they are much less likely to "see huge losses" and it is concluded that the "steady Eddie" approach of Tulloch should serve the investor well. (Grote, 2009)

VII. First State Asia Pacific Leaders Fund Investment Risks

It is stated in the First State Investors IVCV April 2009 report that the profile of the typical investor are those with diversified portfolios., Risk of investing in the Funds include the need for the investor to be aware "that a short-term returns may not match the potential long-term returns. (2009) General investment risks are stated to include: (1) The investments of the Company are subject to normal market fluctuations and other risks inherent in investing in securities; (2) There can be no assurance that any appreciation in value of investments will occur; (3) The value of investments and the income derived from them may fall as well as rise and investors may not recoup the original amount invested in the Company; (4) There is no assurance that the investment objectives of any Fund will actually be achieved; and (5) It is important to note that past performance is not necessarily a guide to future returns or growth. (First State Investors ICVC, 2009)

Also stated as a Fund risk factor is that of inflation as it may possibly impact the buying power of the investment in the Funds in the future. Credit risk is listed and as well the effect of initial charge is also stated as an investment risks. Suspension of dealing in shares is an investment risk as there are circumstances that the right of the investors to redeem Shares may be suspended. Fluctuations to currency exchange rates is also considered to be an investment risks as these may "affect the value of an investment." (First State Investors ICVC, 2009)