An Update: Aberdeen Pacific Equity

ABERDEEN PACIFIC EQUITY FUND
AN UPDATE

Fund manager Peter Hames says that the fund is focused in small to mid cap stocks in markets such as Indonesia and Thailand as they offer much better value than their large cap counterparts. However when it comes to Singapore, it's more a mixed bag. And despite the recent run-up, he still finds the equity market attractive. As at the end of August, it was one of the best performing bourses in the region. The run-up had been accompanied by strong economic data, as the government announced 11.7% GDP growth year-on-year for the second quarter of this year. Growth however is expected to slow in the third and fourth quarters of 2004. This has raised concerns that all the good news has been factored into the market and that the rally will run out of steam. That needn't be the case notes Hames. He acknowledges that economic growth may not be as robust in the latter half of 2004, but says that isn't the only underlying driver for the equity market. Rather he points to the restructuring that has been going on without much fanfare, in Singapore companies. This should result in good growth for the equity market.

"A lot of people have written Singapore off mistakenly saying the growth story was over. That's a dangerous thing to do, given the financial strength of Singapore, and its ability to adapt and develop. In Singapore, you have some very financially strong companies, whether they are the banks or the likes of SIA. Companies in Singapore have done far more in terms of restructuring, and focusing on shareholder value than many of their Asian counterparts. They have been selling off non-core assets, and giving that back as dividends to shareholders. They are doing the right things. For example, the banks are going into regional markets, and that's exactly what they should be doing. I think the equity market is poised for good growth. And I think investors are beginning to gradually recognize that," says Hames.

In general, Hames shuns Asian tech companies and prefers those that tap the growing consumer demand in the region. As a result, he ends up favouring Southeast Asian markets that have such companies, but are often overlooked by other fund managers for liquidity reasons. Despite Asia being a manufacturing powerhouse, he is wary of exporters for the same reason that he is wary of Asian technology companies: they lack pricing power and branding. "Export isn't a theme that we are particularly bullish on in Asia. Asian companies don't really have strong brand names or pricing power in this area. In the Singapore market, the only real exporter we own is Venture, and they manufacture components. Where we do own exporters, they tend to be strong brand names like Samsung in Korea. I know that a lot of other funds may own Samsung, but its strong brand means it has pricing power. But as a rule we don't like exporters. Margins are always under pressure and you have to keep cutting costs."

What Hames does like are financial companies, mainly because they are centered on consumer demand. He believes that financial services is growing rapidly in Asia, and that there will be consolidation among banks, as they better prepare themselves to serve their customers. In fact Hames believes that as Asia's services sector grows in sophistication, the region will become much less dependent on exports. "If you look at the growth in financial services, it's a result of consumer demand - customers wanting more loans, unit trusts etc. You've seen a lot of consolidation in the banks in Korea, in Hong Kong, Taiwan etc. You've also seen it happen in Thailand, although to a lesser extent. In places like Taiwan there should be mergers in the financial sector, because there are far too many small banks. One of our long-term beliefs is that Asia is becoming more service oriented and domestically driven. As a result, region will increasingly be less dependent on exports."

ANNUALISED RETURNS OF THE FUND VS PEERS AS AT 31 AUGUST 2004

Source: Fundsupermart.com Performance in percentage calculated using offer-to-bid prices and in SGD, with income re-invested.

FUND DETAILS (as at 31 July 2004)

Top 10 Holdings

Country Allocation

Sector Allocation