Phillip Asia Pacific Growth Fund

Unlike the majority of Asian funds that Fundsupermart carries, the Phillip Asia Pacific Growth Fund (click here for the factsheet) invests in Asia INCLUDING Japan. The fund was launched in November 1995 and since inception the fund has performed consistently well against its benchmark, the MSCI AC Asia Pacific SGD Index (the performance of the fund versus its benchmark is shown below). It has also fared well against other pan-Asia funds (see table below). The fund is diversified across sectors with consumer and financial stocks forming 45% of the fund. The fund's largest single country weighting is in Japan, which makes up slightly over 30% of the portfolio.

The fund is currently managed by Jeffrey Lee, who is also Chief Investment Officer at Phillip Capital Management. Lee had managed the fund from inception till 1999, after which it was temporarily managed by AIB Govett Group, the parent company of Phillip Capital Management. He took back the reins in November 2003, and manages the fund to this day.

In this email interview the fund house discusses its outlook for Asian markets in 2005. It adds that while markets are likely to be volatile going forward amid slowing global growth, there are still good stock opportunities in the region. On a sector basis, the fund is positive on Resources, Infrastructure, Consumer, Technology and Telecommunications. Read on to find out more.

A: Asia used to be a sell story, the moment the OECD leading indicators faltered. This time round, the Asian stock market action is becoming more domestically driven, having held steady or rising even when OECD leading indicators declined in the past quarters. The region's resilience is further supported by the emergence of China as a source of demand.

Also, the prospect for Asian currency appreciation will attract monies to this part of the world. Though Inflation is creeping up, it is from very depressed levels. Over the medium term, strengthening currencies and low real interest rates, even if nominal rates rise, are positive for domestic consumption and asset reflation themes in Asia.

Global growth uncertainty will render Asian exporters more susceptible than domestic-oriented companies, although a pickup in growth expectations will lead to a period of outperformance for the exporters.

We find Asia, relative to the rest of the world, attractive based on valuations, growth expectations and the reasonably high dividend yields.

Q: The fund its the highest weighting in terms of country allocation, in China/ Hong Kong and Japan, while concerns regarding the economies of China and Japan are still present. What are your views on China/ Hong Kong and Japan?

A: The China growth story is something that is definitely not over. China's rapidly growing middle class will continue to dominate investor minds. With a more affluent middle class, China will consume more financial services, spend more on leisure, travel and automobiles. Chinese residents will be keen to diversify their wealth into banks that are not state-owned. Hong Kong will be a major beneficiary of these trends, but this is also good news for its other neighbours.

Japan is going through what we believe is a mid-cycle pause. Japan is fairly attractive from a valuation standpoint and structural improvement standpoint. At the corporate level, Japan's "bubble economy" debts have been repaid, and labour costs as a percentage of sales have been declining. ROE for corporate Japan, which was at zero a few years ago, has also been rising. Revenue growth, when it returns in a meaningful way, will deliver the operating leverage for earnings.

Q: What sectors/areas of the region's economy are most likely to perform well for the next two to three years?

A: We are generally positive on Resources, Infrastructure, Consumer, Technology and Telecommunications. In the resources sector, we think China's demand will be sufficient to keep global commodity markets in deficit. For Infrastructure and utility stocks, it is because they are able to offer steady and sustainable high dividend yields to cushion market volatility.

The Basel II Accord, due to be implemented for G-10 banks from 1 January 2007, lowers capital requirement for retail lending. The main beneficiaries of increased consumer lending at potentially lower spreads, will be consumers (eg. retail, leisure and entertainment etc) and property companies. Asian household debt levels and land prices have ample opportunity to play catchup in a global context.

The tech cycle is due for a turnaround after declining in recent years. In some instances, tech companies have also become dividend plays given capex restraint and corresponding increase in cashflows. Telecom companies have strong cashflows and decent dividend yields. Additionally, M&A opportunities will drive stock performance, as in the case of the US telecom sector.

Q: How is the investment strategy positioned to benefit from this or are there any other themes the fund is adopting?

A: High dividend yielding stocks have outperformed over the last five years. We will target quality stocks with sustainable high dividends yields, yet also having reasonable growth and price appreciation potential.

Q: Cash holding for the fund stands at 11% as at 31 Jan 2005. This is higher than the usual 1-2% for equity funds. Please elaborate on the reasons for this and on the fund investment strategy as well.

A: We are not benchmark huggers. What we often try to do is to find better alternatives to benchmark stocks.

We have flexibility in our investment approach, adopting elements of top-down and bottom-up. We also allow for both growth and value-style investing, because there will be periods where one style will outperform the other.

We buy into investment themes early, and we also leave the party early. We believe it is always good to leave something on the table for the next investor who comes along. We are not afraid to sell when valuations get outrageous.

We try to buy companies at a reasonable discount relative to their assets and growth, and this helps to minimize the downside risk. The limited offering, in what we would normally deem as attractive investments, were behind the recent buildup in cash. However, we have recently identified new investment opportunities and have been putting the cash to work since.

Q: What risks will investors of this region face in the next two to three years? How does the fund manage these risks?

A: We consider a sharp US dollar weakening and sustained high commodity/energy prices as risks. However, the fund is buffeted from these risks by overweighting domestic consumption/ reflation stocks relative to exporters, and by investing into oil stocks and Australian resources.

We also favour big-cap stocks which are in a better position to weather any potential pitfalls.

As long as we buy quality companies at very cheap prices relative to their growth and assets and offering decent dividend yields, we actually can increase our margin for error. We target quality companies with strong business models, strong cash flows, sustainable high dividend yields and capital gains potential.

This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer.