Time to add spice to the portfolio

High growth and cheap labour are tempting fund managers back into Asia. By Alison Eadie
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The Independent Online
Over the past year funds covering Asian and Pacific economies (excluding Japan) have fared poorly - nearly all show a loss. However, the long term prospects remain good.

Three funds are now in various stages of launch. There is Guinness Flight's Asian Smaller Companies unit trust, a sub-fund of its Guernsey umbrella fund. Schroders' AsiaPacific investment trust is for small investors with a minimum subscription of pounds 2,000. And Abtrust's Asian Smaller Companies investment trust is being placed with institutions, but will be be available to private investors. The arguments for investing in Asia hinge on economic growth and demographics. Real gross domestic product (GDP) growth in Asian economies over the past 18 years has averaged 7.2 per cent a year against 2.6 per cent in industrialised countries. Ninety per cent of the 2.8 billion population are under retirement age, providing a huge, cheap labour force and a vast domestic market.

Industrial revolution is gathering pace. As markets like Hong Kong mature, new ones in China, India and elsewhere open up to foreign investment. Risk is tempered by greater diversity. Ten years ago choice was confined to a limited number of major companies in Hong Kong, Malaysia and Singapore. There are now many more markets and many more companies.

The arguments for Asian smaller companies are even more compelling. Foreign money flowing into the region in the past five years has been directed at big companies. Small companies have been neglected, but their growth potential is greater. Tim Guinness, joint managing director of Guinness Flight, points out that the Hang Seng index, composed of big companies, is on a price multiple of 12 times earnings, but the multiple for Hong Kong's small companies is a mere six times earnings. Abtrust estimates that across Asia, smaller companies are at a 30 per cent discount to their larger counterparts. The key downside factors, according to Peter Fuller of independent fund analysts Fund Research, are US interest rates, the US dollar and political risk.

The Mexico effect, where US interest rate policy led to a large outflow of foreign capital can equally easily happen in Asia and the strength or weakness of the US dollar affects investment returns. Mr Fuller also points out that Deng Xiaoping only has to say boo and the Taiwanese stockmarket goes into a tailspin.

Whatever the risks, investors looking for capital growth rather than income may be tempted to tuck some Eastern promise into their portfolios. But they must consider how much and what fund. Hong Kong, Malaysia and Singapore are no longer viewed as emerging and fund managers pressing the Asia case believe a core holding of 10 per cent in Asia alone is reasonable. Mr Guinness says sophisticated private investors could allocate 25 per cent.

Picking a fund depends enormously on the track record of the fund manager in the region. There are huge disparities in performance between the top and bottom performing Asia funds, as our table shows.

Risk varies according to asset allocation. Schroders' AsiaPacific Fund aims to beat the main Asia index, the MSCI Free. Guinness Flight's Asian Smaller Companies model portfolio allocates 72 per cent of funds to Hong Kong, Malaysia and Singapore and 2 per cent to China. However Abtrust only intends to allocate 5.5 per cent to Hong Kong with as much going to China. Malaysia will get 7 per cent, Indonesia 17 per cent and Koala and the Philippines l0 per cent apiece.

With more than 70 Asia unit and investment trusts to pick from, investors can opt for an existing fund rather than a new one. Single country funds, notably those investing in smaller economies are high risk.

Future success in the region will increasingly depend on getting the new burgeoning marfets of China and the Indian subcontinent right. Fund managers insist the returns will be there, but the path of capital growth may not be smooth. For long term holders only.

BEFORE YOU INVEST

LOCK the fund away for your retirement in 20 years time, By then it should have weathered the peaks and troughs and earned a handsome capital growth.

Check the country allocation of your chosen fund to see how much is in higher risk markets.

Ppick a manager with plenty of experience and on the spot coverage of Asian countries.

don't

INVEST all your worldly wealth in Asia. A limit of10 per cent is probably enough.

Earmark the fund for school fees due in three years. It could be a bad year.

BEST AND THE WORST OF ASIAN FUNDS: FIVE-YEAR PERFORMANCE

Top five pounds

1 Gartmore HK Unit Trust 423.71

2 Ivory & Sime Pacific Assets Inv Trust 398.09

3 Old Mutual HK Unit Trust 381.94

4 Murray Johnstone Scottish Asian Inv Trust pounds 359.80

5 HSBC HK Growth Unit Trust pounds 356.44

Bottom five pounds

46 Thornton Asian Emerging Markets Inv Trust pounds 154.34

45 Baillie Gifford Pacific Horizon Inv Trust pounds 172.25

44 Lloyds Bank Pacific Basin Unit Trust pounds 180.53

43 Clerical Medical Dragon Growth Unit Trust pounds 210.79

42 Hill Samuel Far East Unit Trust pounds 218.39

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