Asia Pacific All Cap UpdateDownload document (485 kB)
Following our letter of 19 March 2020, we would like to provide further details about the transition of the Stewart Investors Asia Pacific Fund, as it becomes the Stewart Investors Asia Pacific and Japan Sustainability Fund. These changes officially take effect on 22 May 2020.
Who is managing the Fund?
Upon the departure of Ashish Swarup from Stewart Investors in September 2019, the Stewart Investors Sustainable Funds Group took over the management of the Fund. The Stewart Investors Sustainable Funds Group is the same team who oversee the Stewart Investors Asia Pacific Sustainability Fund, Stewart Investors Asia Pacific Leaders Fund and Pacific Assets Trust - David Gait, Doug Ledingham, Sashi Reddy and Chris McGoldrick.
The Fund is managed with the same philosophy and process that is applied to all funds managed by the Sustainable Funds Group - a long-term, benchmark-agnostic approach that aims to protect and grow clients’ capital by owning a concentrated portfolio of high-quality companies well-positioned for sustainable development.1
When investing with a long-term time horizon, sustainability and quality become critical to wealth preservation and growth. Understanding how a company is positioned relative to the many development challenges facing our planet today forms a key part of how we think about growth and risk.
We believe poorly positioned companies are likely to face consumer pressure (from greater awareness) and regulatory constraints as governments globally become more responsive to the need for a better model of development - one that allows human development within the limits of a finite planet. We consider examples of poorly positioned companies to include cigarette companies, carbon-heavy resource companies or consumer companies selling alcohol or sugar-intensive products.
Quality is critical if businesses, and shareholders, are to benefit from the long-term tailwinds2 enjoyed by an advantageous position. There are many companies or sectors that, although being well-positioned to contribute to sustainable development, have untrustworthy or incompetent management teams, franchises incapable of generating economic returns or balance sheets loaded with debt. Popular examples today might include manufacturers of electric vehicles, providers of plant-based meat and solar panel manufacturers.
By choosing to invest in high quality franchises run by high quality people that are well positioned to benefit from sustainable development, we can own companies that have a higher likelihood of delivering attractive long-term absolute returns3 with less risk.
What is the attraction of an Asia Pacific including Japan mandate?
Over the last 30 years, we have looked to own the very best quality Asian companies, regardless of place of listing, incorporation or index membership. This is an investment-led decision as we believe it makes no sense to constrain our investment universe by following narrow definitions of geography decided by index providers. For example, clients in our Asian funds with the capacity to invest in Australia have benefited from an expanded universe of quality companies beyond a narrow definition of Asia. Yet despite the greater pool of companies, we have never made any concessions to our philosophy or process in order to own Australian companies or to match a ‘benchmark weighting’. Of the c.2 ,000 listed companies in Australia, we have owned only a handful.
In 2015, we began owning Japanese companies in our Asian funds if their economic exposure to Asia (ex Japan) was greater than 50%. As of 11 May 2020, our Asian funds own four Japanese companies, with between 12% and 15.5% total exposure to companies listed in Japan. Again, our ability to invest beyond the index providers’ definition of Asia has allowed clients to own China’s largest paint company, China’s largest baby product company, Asia’s largest personal hygiene company and a leading supplier to Asia’s semiconductor and eye-care industries. These companies have been material contributors to performance over the last five years and protected capital year-to-date during a very volatile environment with three of the companies in positive territory and all four outperforming the MSCI Japan, MSCI AC Asia Pacific and MSCI AC Asia Pacific ex-Japan indices4.
The ability to invest directly in Japan will allow clients to own high quality Japanese companies far earlier in their Asian growth journeys, as well as accessing a greater pool of domestic companies with attractive growth opportunities.
How will the Fund be managed?
There will be no change to our process or philosophy. The Fund will continue to be built bottom-up, with a blank sheet of paper as we look to own the highest quality 40-60 companies in the investible universe that offer the most attractive, long-term, absolute returns.
As with any country that sits within our investible universe, there will be no concessions made in order to own Japanese companies. If there is a point in time when we are unable to find any high quality, investible ideas in Japan, we will not allocate any capital there.
What will the Fund look like?
Many of the largest companies in Japan fail to meet our strict quality criteria. As a result, the Fund’s Japanese holdings will look, and behave, very differently from the MSCI Japan and MSCI AC Asia Pacific indices. For example, the four Japanese companies currently owned by our Asian funds cumulatively account for only 2% of the MSCI Japan Index5. Of the over c.3,500 listed companies in Japan, we envisage owning five to ten companies in the short to medium-term with minimal overlap with both domestic and regional indices.
The Fund’s ex-Japan holdings will have significant overlap with our all-cap Stewart Investors Asia Pacific Sustainability Fund.
We are very excited about the opportunity to own a number of high quality Japanese companies that have historically sat outside the investible universe. However, we appreciate that some clients will allocate assets to Japan separately or may even be unsure by what we mean by sustainability.
We would welcome the opportunity to discuss the transition in more detail, so please get in touch with your relationship manager or via our website.
These figures refer to the past. Past performance is not a reliable indicator of future results. For investors based in countries with currencies other than GBP, the contribution may increase or decrease as a result of currency fluctuations.
Source: Stewart Investors. Contributions are calculated at the investee company level before the deduction of any fees incurred at fund level (e.g. the management and administration fee) but after the deduction of transactional costs. Contribution data is calculated from the full portfolio and includes cash.