Asia Pacific and Japan Sustainability

Risk Factors

This information is a financial promotion for the Stewart Investors Asia Pacific and Japan Sustainability Strategy intended for retail and professional clients in the UK only.

Investing involves certain risks including:

  • The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.
  • Specific region risk: investing in a specific region may be riskier than investing in a number of different countries or regions. Investing in a larger number of countries or regions helps spread risk.
  • Emerging market risk: Emerging markets tend to be more sensitive to economic and political conditions than developed markets. Other factors include greater liquidity risk, restrictions on investment or transfer of assets, failed/delayed settlement and difficulties valuing securities.
  • Currency risk: The strategy invests in assets which are denominated in other currencies; changes in exchange rates will affect the value of the strategy and could create losses. Currency control decisions made by governments could affect the value of the strategy’s investments and could cause the strategy to defer or suspend redemptions of its shares.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.

If you are in any doubt as to the suitability of our strategies for your investment needs, please seek investment advice.


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Strategy overview

The strategy was launched in June 1988. In September 2019, it was inherited by the Sustainable Funds Group and in May 2020, transitioned to become an Asia Pacific and Japan Sustainability strategy. This change means the strategy is able to invest in companies that derive the majority of their economic exposure from Japan. The ability to invest directly in Japan allows 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 that are positioned to benefit from and contribute to sustainable development. 

 

Strategy update

1 April - 30 June 2021

Over the quarter, a rare bout of volatility, in what have largely been unshakeable upward markets, presented the opportunity to increase our exposure to high-quality names in Japan and China.

In Japan, a position in AS ONE was initiated after “the market” took issue with short-term results. AS ONE is the leading wholesaler of scientific and healthcare instruments in Japan where dominant scale allows them to offer the broadest collection of products at vastly superior delivery times versus smaller peers, and in doing so creating significant value for researchers and scientists. Effectively operating as a “one-stop shop” for scientists and researchers, AS ONE, facilitated by a long-term family owner, has a unique business model that we believe is capable of weathering economic cycles while generating attractive margins, returns and cash flows. We have studied equivalent businesses in the US and Europe and believe this business model offers durable competitive advantages while playing a critical role in supporting global innovation. Longer term, we believe AS ONE has the potential to improve the quality of its franchise through the shift toward online ordering while also expanding their valued service to research departments in the rest of Asia.

We also added to the holding in Mani (instruments used in dental and ophthalmic surgery). Mani is another of our Japanese holdings that is very well positioned to take advantage of growth in emerging Asian markets.

Broad weakness in China offered the window to invest in two new names: we continue to build positions in these companies so will refrain from naming them directly. The first is a leading provider of molecular testing equipment that will play a critical role in addressing China’s growing cancer burden. The second, is an emerging local champion in China’s robot industry with attractive long-term tailwinds, driven by growing automation spend and the government’s want to reduce dependence on global multinationals.

These purchases were largely funded through the complete disposal of a small position in Dabur (India, Consumer staples) and trimming Xero (Australia, IT), Mediatek (Taiwan, IT) and Tokyo Electron Limited (Japan, IT) due to stretched valuations.

With many markets trading near all-time highs, volatility near all-time lows, the continued focus on narrative rather than fundamentals, a growing list of fraudulent activity and an unshakeable infatuation with high-growth companies, we are keeping an eye on capital preservation and downside protection rather than trying to outrun overly exuberant markets.

We are not in the forecasting business so won’t claim to know when things will change, only that they will. In response to that uncertainty, we look to build resilient portfolios from a diversified collection of high-quality businesses run by high-quality people on reasonable valuations. This disciplined philosophy has protected capital in most drawdowns while allowing us to participate in up markets: a combination that, over the long term, has delivered attractive long-term returns.

The opportunity that lies ahead of a long-term investor in the Asian region is an exciting one. It is home to some of the highest quality stewards, and highest quality franchises globally, with many avenues for long-term growth.

1 January - 31 March 2021

For us, the privilege of meeting a new management team tends to be an enjoyable experience. Especially one that embraces long-termism and talks with great pride and enthusiasm for its culture.

We recently had such an opportunity with leading New Zealand-listed logistics provider, Mainfreight, and their veteran CEO Don Braid. Don, very humbly, places responsibility of Mainfreight’s enviable long-term track record entirely with their very tangible culture of ownership, as well as the consistent application of a deeply ingrained one-hundred year vision in everything they do; from the executive suite to the truck yard. In a people-heavy, relationship-dependent business like logistics, our experience is that the great operators have truly unique, long-term, cultures. On top of their impressive track record and attractive fundamentals, we believe Mainfreight’s culture should allow them to continue to flourish in New-Zealand while growing in the, much larger, fragmented markets of Asia and the US. A position in Mainfreight was initiated over the quarter.

There are a number of companies in the strategy where we are backing management teams to evolve established franchises into new geographies or business areas. Vinda International (Hong Kong), is one such example. Here we have one of China’s leading consumer tissue paper players, with help from their multi-national parent Essity (owner of the Tena brand), investing in growing their early stage personal hygiene business. A successful evolution has the potential to be very rewarding for shareholders, as feminine hygiene and incontinence care are markets that enjoy greater consumer loyalty, higher profitability and superior returns on capital than tissue paper. Over the period we had the chance to catch up with Vinda’s CEO, Karen Li, when she talked with great enthusiasm of the long-term investments being made today, that are likely to pay off in the years to come: 70% sales growth in their feminine hygiene category last year shows some progress being made on this front.¹ Despite their well-articulated long-term strategy and early signs of success, valuation multiples fail to give Karen and her team the benefit of the doubt. The strategy’s position in Vinda was increased over the quarter as the combination of improving quality of earnings as well as a potential valuation re-rating offers an enticing opportunity for attractive long-term returns. 

Two small positions were sold over the quarter: OCBC Bank (Singapore) and Kasikornbank (Thailand). Although we have much admiration for these lenders, elevated levels of consumer debt and growing regulatory risks combine to make high-quality growth hard to come by, unlike the financial institutions that continue to be held in India and Indonesia.

1. Source: Stewart Investors investment team and company data.

Source for company information: Stewart Investors investment team and company data. Portfolio data shown is from representative strategy accounts. New investments disclosed relate to holdings with a portfolio weight over 1%. It is not a recommendation or solicitation to purchase or invest in any fund. Differences between the representative account-specific constraints, currency or fees and those of a similarly managed fund or mandate would affect results.

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Proxy voting

1 April - 30 June 2021

Asia Pacific and Japan Sustainability

During the quarter there were 245 resolutions from 23 companies to vote on. On behalf of clients, we voted against 10 resolutions.

We voted against Pentamaster International, Vinda International and AK Medical Holdings’ request to repurchase issued shares, and issue shares without pre-emptive rights, as the share discount rate had not been disclosed and the share issuance was excessive. (six resolutions)

We voted against Shenzhen Inovance Tech’s request to adopt a long-term stock ownership incentive plan as there was a lack of disclosure and transparency on the plan. We also voted against their request to elect an individual to their Supervisory Council as we do not believe they are truly independent. (four resolutions)

Source for company information: Stewart Investors investment team and company data. Numbers may not add to 100 due to rounding

1 January - 31 March 2021

Asia Pacific and Japan Sustainability

During the quarter there were 53 company resolutions to vote on. On behalf of clients, we voted against seven resolutions.

We voted against Centre Testing International’s request to make amendments to a number of proposals including changes to their accounting policies as we did not have sufficient information to know what changes we might be voting for. (seven resolutions)

Source for company information: Stewart Investors investment team and company data. Numbers may not add to 100 due to rounding

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Fund data and information

Click on the links below to access key facts, literature, performance and portfolio information for the funds and share classes available in this jurisdiction:

Asia Pacific and Japan Sustainability Fund A Acc GBP Asia Pacific and Japan Sustainability Fund A Inc GBP Asia Pacific and Japan Sustainability Fund A Acc EUR Asia Pacific and Japan Sustainability Fund B Acc GBP Asia Pacific and Japan Sustainability Fund B Inc GBP Asia Pacific and Japan Sustainability Fund B Acc EUR

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Investment terms 

View our list of investment terms to help you understand the terminology within this document.

Important information

This material has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time.

Some of the information has been compiled using data from representative strategy accounts. This information relates to existing Stewart Investors strategies and has been provided to illustrate Stewart Investors’ expertise in the strategies This material is provided for information purposes only and does not constitute a recommendation, a solicitation, an offer, an advice or an invitation to purchase or sell any fund and should in no case be interpreted as such.

This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this material. The distribution or purchase of shares in any funds, or entering into an investment agreement with

Stewart Investors may be restricted in certain jurisdictions.

This material is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this material has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this material.

References to “we” or “us” are references to Stewart Investors. Stewart Investors is a trading name of First Sentier Investors (UK) Funds Limited, First Sentier Investors International IM Limited and First Sentier Investors (Ireland) Limited. First Sentier Investors entities referred to in this material are part of First Sentier Investors, a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this material or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

Past performance is not a reliable indicator of future results.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.

United Kingdom

In the United Kingdom this material is a financial promotion and is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.