The annual Morningstar Hong Kong Fund Awards are designed to help investors identify the retail funds and fund houses that added the most value for investors within the context of their relevant peer group in 2015 and over longer time periods.
To help our readers better observe what makes a winner fund, we asked the winning teams to shed lights on some major changes they made to the portfolio over the course of 2015, how various risks affect their investment decisions and their investment team structure, etc.
Best Asia Pacific Equity Fund -- First State Asia Innovation Fund
Key Stats
Inception Date: 18 October, 2002
Morningstar Rating (as of 2016-02-29): 
Total Net Assets (Mil, as of 2016-02-29): 31.60 USD
Manager: Richard Jones
Manager Start Date: 1 July, 2011
M: Morningstar R: Richard Jones, Director, First State Stewart Asia
M: Could you highlight any major changes you made to the portfolio over the course of 2015? Were there any particular holding(s) that drove the fund’s performance for the year?
R: The First State Asia Innovation Fund has continued to perform resiliently amid volatile markets.
Adding to performance, Korean companies LG Chemicals Limited and LG Household & Healthcare outperformed significantly over the year.
An early acquisition of LG Chemicals meant that we were able to build a position at just under book value in terms of valuation. The company has been doing very well in the electric vehicle market and announced a strategic partnership with General Motors to supply batteries and key parts to the auto company’s electric car division. A lower oil price has also benefited the company’s profit margins.
Meanwhile, LG Household & Healthcare was boosted by strong sales in China and solid revenue growth through inbound Chinese tourist traffic at duty free stores. Its presence in the domestic market also continues to gain market share, resulting in an overall increase in operating profit. However, we sold LG Household & Healthcare after owning the company for a number of years, as the share price now seems rather full.
We have done comparatively little repositioning over the year, though we have taken advantage of market retracements to add to existing positions and buy into quality companies that were more reasonably valued.
For example, in China, we topped up our positions in Sun Art Retail and China Mengniu, which continue to execute as expected. On a longer-term view, these companies should still provide decent growth prospects, despite the near-term slowdown. However, we are losing confidence in Tsingtao, which, despite its cheaper valuation, is facing a declining market and is being squeezed by both lower-end brands like Snow beer as well as higher-end imported beers.
Meanwhile, we sold a number of our smaller bank holdings, with BDO Unibank in the Philippines, Siam Commercial Bank in Thailand and United Overseas Bank (UOB) in Singapore all disposed of. It is not hard to believe that conditions will get tougher for banks, though we remain quite exposed to UOB though family-holding company Haw Par International. Haw Par – which is a non-index stock – is a Top-5 holding in the Fund. It is a small, relatively illiquid company, but owns 5% of UOB, as well as the well-known pain-relief ointment brand Tiger Balm. Tiger Balm makes US$25 million in net profit per annum and a reasonable valuation implies that the UOB stake is being valued at half the market price.
M: What is your outlook for 2016 specific to the markets you cover and how are you positioned to take advantage of opportunities and/or mitigate potential risks?
R: Overall, we remain more cautious than optimistic, with our key focus still intent on preserving client capital. As a team, we will as usual continue to invest by focusing on the potential downside as well as the upside of share price performance. However, Asia remains one of the few areas of the world that should continue to enjoy secular growth tailwinds in future and there should still be plenty of opportunities to be had in an absolute sense. Any period of retracement would provide us renewed opportunities.
It is probably too early to start focusing on what we might gain and quality is by no means yet on sale, but valuations are now more attractive. Just as we are usually fearful when everybody is ebullient, today the opposite stance perhaps seems more appropriate.
M: Can you comment on the macro risks facing the global economy, including the US rate hikes, weaknesses in commodity prices and the significant headwinds facing the emerging world? How do these risks affect your investment decisions?
R: Most of our macro insight, as and when we have any, is gained from direct meetings with companies. Our top-down views are therefore merely a reflection of executive feedback. While we often find it useful to consider each business in the context of the broader macro framework, we certainly do not invest on that basis – we are wrong just as often as anybody else about currency, political and macro trends. But of course, it is helpful to, at the very least, consider the obverse of the generally held (and often well-discounted) view. Ultimately, in our experience high quality businesses find a way to prosper, come what may.
M: How is your investment team organized? Have there been or do you anticipate any changes to the investment team or structure over the course of the year? Do you anticipate adding to the team in the near future?
R: The First State Stewart Asia investment team – currently with 15 members sitting in Hong Kong, Singapore and Edinburgh – are all primarily investment analysts. Some of the team also hold portfolio management duties. We have a flat team structure and encourage all team members to lead and participate in lively investment debates during our thrice-weekly team-wide meetings (we also hold additional investment meetings in smaller groups for specific investment sub-regions).
We are always looking for quality talent to join the team, though we have nothing to announce at this moment.
M: Can you highlight any areas where you feel that the investment team or the investment process can be improved upon?
R: We are somewhat under-resourced in Japan equities and have been looking to add to the team to support Sophia Li, who manages our Japan equity portfolio, to cover the Japan market. The portfolio follows the same rigorous investment process and in-depth research and analysis as our Asia Pacific funds.
As some of our regional funds and client mandates have the flexibility to invest outside the restrictions of an Asia Pacific ex-Japan mandate, we have been investing in select Japanese companies since 2011. We hope to be able to expand our coverage of Japanese stocks soon.
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