Fund Manager Q&A: Allianz Total Return Asian Equity
- Focused Asia ex Japan equity portfolio of high conviction ideas, portfolio holding around 40 stocks.
- Unconstrained strategy investing only in stocks with strong conviction. High exposure (typically 30-40%) to mid and small cap companies which offer strong growth potential at reasonable valuations.
- Has significant exposure to Asia’s increasingly affluent ‘new consumers’ which Yuming believes will be the key driving force in Asian equity markets in coming years.
What is the underlying strategy of the fund?
The fund is a long-only, bottom-up stock picking fund focused on Asia ex-Japan’s equity markets. There are 3 key elements:
a) The fund is unconstrained. By that we mean we only invest in companies that meet our investment criteria, irrespective of the benchmark weighting. If we don’t like the largest index stocks we won’t own them.
b) The fund is relatively concentrated. We only invest in around 40 companies. We find this gives us the right balance between having high conviction while still maintaining a diversified portfolio.
c) We invest in high quality companies with sustainable growth drivers. Despite the economic slowdown in Asia there are a number of areas which remain bright spots such as the rapid expansion of e-commerce, the demand for high quality, private healthcare, and strong growth of regional tourism.
What are the biggest challenges for emerging markets in 2016?
The main challenge is the environment of slowing economic growth. In Asia, China is the key. The country is undergoing a transition away from a reliance on traditional growth areas such as cheap exports, and towards a balanced economy with consumption and services leading the way. Ultimately this will result in a more sustainable economic structure. This transition will take time. However, there will be periods, like we are seeing at the moment, when investors get concerned that China’s economy is slowing too rapidly.
Why should an investor hold an allocation to emerging markets?
An investor’s allocation to emerging markets is naturally determined by their attitude to risk. In the long term many emerging markets have significantly stronger growth potential than more mature developed markets. But the investment path can also be less predictable and investors need to accept the higher volatility that comes with the potential for higher returns.
What are your views on China after the recent slowdowns?
Our view is that the economic environment in China is challenging, but not as bad as many people are suggesting. The ‘old’ economy, which includes traditional industries such as glass, cement, steel and other areas related to property and infrastructure have significant over-supply. This is forcing down prices and leading to strong deflationary pressures. Conversely, however, China’s ‘new economy’, especially related to service sectors such as tourism and e-commerce is showing strong growth. The transition from old to new will take time and there will be periods of uncertainty, like we are seeing at the moment. We believe this has led to many Chinese stocks being extremely cheap. Of course some of them deserve to be, but equally others have been unfairly punished and have the potential to deliver strong returns from very depressed levels.
What opportunities lie in Asia specifically?
We believe the biggest opportunities come from what we call ‘Asia’s new consumer’. This is a new generation of increasingly affluent Asian consumers who are fundamentally different from previous generations in terms of what they buy and how they buy. A good example of this is e-commerce. Anyone who has been to China recently can’t fail to notice how widely used smartphones have become for mobile payments. This goes far beyond how we use them in the UK. ‘Singles Day’ in China has become one of the biggest online shopping days in the world. Last year on 11 November, for example, Chinese consumers spent over USD 14 billion on line. The biggest online shopping event ever in the US was Cyber Monday last year when the equivalent figure was just over USD 3 billion.
We are also seeing a fundamental change in what is being bought, in particular a shift from ‘needs’ to ‘wants’. In practice this translates to a diverse range of areas such as rising demand for high quality, private healthcare, increasing penetration of life insurance and strong growth of regional tourism. In many cases the story is still young. Only around 5% of the population in China has passports, for example, and as incomes continue to rise then a growing number of people will wish to travel abroad.