UK Investment Association Sector Reclassification: Asia Pacific ex JapanDownload document (594 kB)
From 1 October 2017 the Stewart Investors Asia Pacific Leaders Fund and Stewart Investors Asia Pacific Sustainability Fund will be moved from the Asia Pacific ex Japan category to the Specialist category of the UK’s Investment Association (IA) sector classification.
We are writing to advise you that from 1 October 2017 the Stewart Investors Asia Pacific Leaders Fund and Stewart Investors Asia Pacific Sustainability Fund will be moved from the Asia Pacific ex Japan category to the Specialist category of the UK’s Investment Association (IA) sector classification. This will not involve any change to our investment philosophy or investment process.
The reclassification follows a similar move for our Emerging Markets Funds into the Specialist category in 2014. The reason for changing our Asian Funds now is simply because we are coming across an increasing number of high quality companies which are listed outside Asia Pacific ex Japan, but which generate the majority of their business activities within the Asia Pacific ex Japan Region.
At Stewart Investors, we define a company’s geography based on the location of the majority of its business activities, usually defined by sales. We have used this definition since the launch of our first Asian Fund in 1988. The IA prefers to define a company’s location by Index (MSCI/ FTSE) membership. Both approaches are valid. However, rather than avoid companies outside these Indices in order to meet the IA definition, we feel it is in the best interests of clients that we simply reclassify the Funds to the Specialist sector, and continue to pursue the same investment philosophy we have followed for the past twenty-nine years.
Our starting point for investing in Asia has never been the Index. Instead, we have always set out with a blank sheet of paper to try and find the very best quality Asian companies, regardless of place of listing, incorporation or Index membership. Over the last couple of decades, many good quality global companies – particularly Japanese companies – have built very strong franchises within the Asia Pacific ex Japan region. A case in point is Nippon Paint. Listed in Japan, Nippon Paint established a local Chinese subsidiary in 1992. By 2014, China accounted for only 12% of their sales, with other Asia ex Japan countries accounting for a further 5%. Japanese sales still made up 72% of their business. Move forward to 2017 and the Company expects China to account for 43% of sales, other Asia Pacific ex Japan countries a further 18% and Japan only 30%1. It is now the number one paint company in China. Although the groundwork for Nippon’s overseas success was laid decades ago, it is only in recent years that the benefits have started to come through. The company’s current and future success is now firmly based upon its Asia Pacific ex Japan franchise.
It is the same for a growing number of good quality companies listed outside the Asia Pacific ex Japan region. In addition, an increasing number of companies from Asia Pacific ex Japan have listed on stock exchanges outside the Region. This trend has been accentuated by the privatisation and listing of stock exchanges which now compete globally against each other for new listings, regardless of geography.
As a result, our investible universe of Asian companies looks quite different from that of any Index. Not having the option of allocating clients’ capital to companies such as Nippon Paint, which sit outside the Index but whose businesses are firmly based within the Asia Pacific ex Japan Region, would go against our investment philosophy and limit our clients to owning a subset of potentially lower quality Asia Pacific ex Japan companies.
More generally, globalisation continues to blur many of the traditional boundaries within the investment world. The companies in which we invest clients’ money do not divide their activities according to MSCI categories and nor should we as long-term investors. At Stewart Investors, we have spent many years pondering the long-term viability of geographic asset classes. This is a particularly challenging question for us, given our long history of investing in Asia and Emerging Markets. While there are no simple answers, we have written an article entitled “Family companies are the real attraction of investing in Asia” which can be found on the Stewart Investors website2. We hope you find the article useful and as always, we welcome all feedback on it and the IA reclassification.
If you have any questions please contact your representative directly, or call us on 0800 085 3880 (or +44 131 525 8873 if outside the UK).
Joint Managing Partner
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