Last updated: Mar-18-2019

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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Monday, April 03, 2017

The Asia Pacific markets have seen their share of ups and downs in recent years, and that trend is likely to continue for the time being, according to William Lam, U.K.-based portfolio manager of the FundGrade A+ Award-winning Invesco Indo-Pacific Fund. Still, prices are attractive, and earnings are picking up, so there’s good potential for investors seeking diversification through broad Asian exposure.

Those ups and downs are reflected in the average historical yields from Asia Pacific equity funds – while the average annual compounded rate of return from the category for the 10-year period through Feb. 28, 2017, was a mere 2.6%, the 5-year average was a more heartening 9.0%, and returns for the year through February ran to a very healthy 16.1%.

“On a forward price/earnings basis, the valuation of the Asian equity market is currently in line with its historical average, having spent much of 2016 trading below these levels,” says Lam. “Earnings revisions have turned positive, but for markets to sustain their progress, earnings growth in the low teens may need to be sustained,” he added.

Lam goes on to say, “This is not unreasonable given the current cyclical upturn, but it may prove a stretch if political agendas lead to significant disruption. But one of Asia’s attractions remains its valuation discount to other equity markets, and it does not seem that political or economic risks are substantially higher.”

Nevertheless, Lam admits that such risks continue to exist, and will likely forestall strong and sustained growth in the region. “Asian economic growth is likely to remain anemic by its own historical standards,” he says. “Export growth has started to show signs of improvement, but we do not expect a strong and durable recovery given continued uncertainty in global demand. A shift in U.S. trade policy under Donald Trump is also a risk, although we anticipate the president’s rhetoric will be diluted by the necessity for pragmatism.

“China’s economy is showing signs of stabilization, but this improvement has been accompanied by continued high levels of credit growth,” Lam adds. “Their financial system does not yet appear to be vulnerable to the kind of uncontrolled liquidity shock that has afflicted some emerging economies late in their credit cycle, but China’s corporate debt overhang will need to be addressed eventually.”

Accordingly, Lam intends to continue with the fund’s strategy of choosing stocks carefully, while simultaneously keeping a close eye on the macro environment. This dual focus has enabled the Invesco Indo-Pacific Fund to handily outperform its peer group, with returns of 25.9% for the year through the end of February, 11.7% over 5 years, and 4.9% over 10 years (not scintillating, but still almost double the category average).

That kind of performance has resulted in three annual FundGrade A+™ Awards in 2013, 2014, and 2015, and a current FundGrade™ monthly A-Grade rating for February.

“The big driver in our performance has been stock selection in the IT, consumer discretionary, and materials sectors, as well as in China and South Korea,” says Lam. “We take an active and flexible approach that combines both top-down and bottom-up analyses, beginning with an analysis of liquidity conditions, the key determinant in shaping the environment for Asian equities.

“We look for companies with good quality management teams and undervalued future earnings streams,” Lam says, citing NetEase Inc., a Chinese Internet technology firm, as an ideal target. “NetEase is a great example of a contrarian purchase,” he says. “In our opinion, they are China’s best online game developer. We had been following it since 2009 and believed the company could grow earnings at around 15% a year, and that a fair price/earnings multiple for that growth would be at least 15 times.

“At the time, there had been a lot of news about fraud at U.S.-listed Chinese companies, so all Chinese companies with U.S. listings got sold down heavily, including good ones like NetEase, whose shares were trading at just 10 times earnings,” Lam adds. “When we bought in 2012, our expected annual return was over 20% per annum, and as it turned out, earnings growth has been better than expected, as has share price performance.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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