First State Asian Growth Fund‧Morningstar Fund Awards 2010 Special Editorial

First State Asian Growth Fund

Morningstar Fund Award Winning History of First State Asian Growth

-        2010 Asia-Pacific Equity

-        2008 Asia-Pacific ex Japan ex Greater China Equity

First State Investments is not only a familiar name among investors, but also a frequent award-winning fund house throughout the various Morningstar Fund Awards ceremonies that we have been hosting for nine years in Hong Kong. This year, First State Asian Growth Fund is the winner of the Asia-Pacific ex-Japan category award for the 2010 calendar year. A good fund is one with outstanding performance which can sustain over time. First State Asian Growth Fund demonstrates this trait by winning this award more than once – it was also awarded the winner of Asia-Pacific ex Japan ex Greater China Equity category in the year of 2008.

Performance

First State Asian Growth Fund soared 28.23% in 2010, triumphing over most of its rivals within the same Morningstar category. Its longer-term track record, which is always emphasized by Morningstar, is also impressive by all senses. The Fund posted 3-, 5- and 10-year annualized returns of 6.56%, 14.07% and 14.13% respectively as at the end of March 2011.

The Fund is managed by First State Investments’ Director of Asia Pacific Equities Alistair Thompson. Thompson is supported by a resourceful team composed of 13 experienced and seasoned investment professionals, in which Martin Lau, one of Hong Kong’s most renowned fund managers, is also a core member of this solid team. While it is already one of the better teams in the region, we are delighted to see that they are promoting the organic growth of the team by adding trainees to it. As compared with hiring experienced professionals externally, having the experienced analysts to guide trainees in the early stage of their careers is a better way to ensure new comers can integrate into the team and the broader corporate culture, so as to continue the success of the fund.

Key to Success

Fundamental bottom-up research is one of the cornerstones underpinning the long-term success of the fund. While “fundamental research” could be a commonplace from asset management companies, it is critical but difficult for investors to differentiate them. That said, in First State Investments they have conviction in their beliefs and have paid huge effort in implementing this strategy. The team spends a substantial portion of their resources in interviewing companies’ senior management – only in the year of 2010, they have conducted over 2,000 company visits. The portfolio’s turnover ratio of 25% is also a remarkable testament to its long-term investment philosophy.   

When the small/mid-caps and non-quality names led the rally during the bullish market over the past year, the Fund has only delivered a relative performance to a satisfactory level. In this connection, Thompson was surprised to know that his fund was granted the award. Indeed, it shouldn’t be a surprise to anyone, including Thompson, if they realize that long-term performance instead of most recent short-term performance is of greatest emphasis in our Award methodology.

“Management quality is crucial,” Thompson said, “integrity, fulfilling investors’ expectations, learning from mistakes, sensitive to risk and even employees’ developments are some of the criteria for differentiating good management.”

Several nice moves over the past few years helped the fund’s outperformance. As early as 2007, Thompson started to retreat from financials, especially banking names, on valuation ground and, on the other hand, started to play the China consumption theme. This decision helped the Fund to weather the storm in 2008’ market meltdown and contributed to the outperformance significantly when the domestic demands in the Asia markets rebounded since 2009.

Focuses

What are the investment focuses in the future? That is obviously one of the most important questions coming from the majority of investors. Thompson is putting his answer into action: starting from the third quarter of 2010, he shifted back from domestic consumption related sectors to financials. DBS was a new name introduced to the portfolio in 2010.

Thompson also expressed his penchant for gold mining names. “Inflation becomes a growing concern around the globe.” Thompson said. Adding that the quantitative easing policy of central banks also fuels investors’ worries, gold is not only a good hedge against inflation, but also a risk diversifier to emerging market investors given its low correlation to equity markets. Australian gold miner Newcrest, the largest holding in the portfolio, was another new addition to the portfolio last year.

Talking about the major risks to the Asia markets, Thompson warned that surging inflation and rate hike are the growing trends in Asian markets. The non-performing loan issue of the China banking system and potential asset bubble in Hong Kong and Singapore markets are other areas that investors should pay attention to. 

Postscript

Thompson also highlighted the importance of management quality in the security selection process. When we were asking about how to assess the management quality of a company, Thompson suggested that we have to remain skeptical to what the management of a corporation tells you, especially when she tells you that the company never commit any mistake. We asked him immediately about whether he did commit any mistake. “Yes, indeed. We are sometimes too forgiving to companies’ management.” He answered. He also concluded that mistakes are forgivable, as long as you can learn from them and never repeat them again. We think this is an axiom that no one in the investment world should ignore.