First State star Angus Tulloch answers Citywire's questions

(le fonds First State Asia Pacific Leaders fund fait partie du portefeuille)

As part of a series of Citywire Q&As with some of Europe's leading managers, Angus Tulloch, manager of the First State Asia Pacific Leaders fund, explains his latest market views and investment philosophy.


(Angus Tulloch)

What is your investment style ?

Our investment objective is to focus on achieving consistently strong long-term investment returns for clients without taking undue risk. Volatility of returns is minimised by focusing on capital preservation, as well as capital growth. We are always fully invested, or very nearly so, and thus cannot describe ourselves as absolute return investors. We refer to our style as investing with an absolute return mindset.

We follow an active bottom-up investment approach, whereby the team aims to invest in above average quality companies with conservative, innovative and well motivated managers. We also pay considerable attention to economic, political and other macro-inputs to ensure sufficient attention is paid to market head and tail winds, as well as to diversification. Our belief is that the selection of companies within a portfolio is the most important ingredient in producing above average long-term performance with relatively low risk.

Do you take stock market indices into account ?

With a focus on owning quality companies, we regard benchmark stock market indices as poor representations of potential investment universes. We do not use benchmarks to drive stock selection or portfolio construction so we do not have to own any country, sector or company. We realise that fund managers that consistently do not meet their benchmark index targets will fail. However, we are convinced that the way to achieve superior long-term returns is by applying an absolute return mindset to all investment decisions. By adopting an absolute return mindset we avoid the risk of being carried away when the market occasionally becomes overtaken by indiscriminate euphoria. This focus on the potential downside, as well as on the upside, when making any investment decision means the risk to long-term client returns is significantly reduced.

What areas affected your performance this year ?

Outperformance was helped by Hong Kong & China Gas (Hong Kong: Utilities) which gained as companies with more predictable earnings were favoured and Lihir Gold which was the subject of a takeover bid. LG Household & Healthcare (South Korea) outperformed on optimism about its growth prospects.

On the negative side, a number of Australian stocks were particularly weak over the period. Brambles (Industrials) lagged on concerns regarding customer retention and QBE Insurance Group (Financials) underperformed in a dull global interest rate environment. LG Corp (South Korea: Industrials) lagged as its affiliate LG Electronics failed to make ground on Apple in Smartphone sales.

What potential do you see in Asian shares ?

We do not consider we have a competitive edge in predicting short-term market trends, but we remain cautious on the account of the huge deleveraging requirement present throughout most western countries, as well as possible financial instability in Europe. The longer-term outlook remains positive in absolute and relative terms as the asset class continues to offer an increasing number of well-managed companies focused on shareholder value. The Chinese and Indian economies are expected to drive significant economic growth across the region. In addition, a dividend culture continues to develop in many countries.

How are you positioning the fund ?

As at the end of July 2010, the fund was overweight Consumer Staples, Industrials, Telecom Services, Utilities and Healthcare, whilst underweight Financials, Information Technology, Materials, Consumer Discretionary and Energy. However, we note that Asian consumer companies, perceived to be offering a defensive growth profile, have become a little too ‘fashionable’ with investors. Both the Chinese and Indian markets look priced for near perfection.

On the regional level, the fund is overweight South East Asia and South Korea and underweight Greater China, Australasia and the Indian Subcontinent.

Are you worried about a slowdown in China ?

We are underweight in China at present, given that it is difficult to see how, over the medium term, China could successfully sustain a situation with inflation running at 3%-5% and interest rates as low as they are today. In the case of China, we are also concerned about the longer-term impact of lowering lending standards. Our inherent focus on soundly financed and above average quality companies, current over-weighting of defensive sectors and gold exposure should all help mitigate these negative macro influences.

Can you explain your large position in gold to hedge against inflation ?

We remain conservatively positioned and maintain a large position in Astralian gold miner Newcrest as a hedge against further loose monetary policy.

Much depends on the extent to which inflation rears its head, and also to the time-horizon covered. We would be very surprised if returns from a well structured equity portfolio were not ahead of inflation most of the time.

What would make you less cautious ?

The more ‘aggressive’ sectors, such as Materials and Industrials, currently price in a relatively benign growth and inflation scenario, but offer little protection if this were not to be the case. We will become less defensively positioned when we believe the world’s outlook rests on more stable financial foundations, or when share prices begin to reflect a more realistic appraisal of risk.

Why do you prefer smaller growth nations in South East Asia and Korea ?

Our portfolios reflect our best ideas at any one time, though we adjust these to ensure they are always reasonably diversified in geographical, sector and thematic terms. Lately, we have been finding the best risk/reward opportunities in places such as Singapore and South Korea. Not being index-constrained, we have been able to fully represent this in the composition of our portfolios.

Citywire Verdict : Angus Tulloch has made his name through a conservative approach to investment in Asia. His funds are without equal when it comes to minimising losses and he has been rewarded with top quartile performance over three, five and ten years.

(Citywire - 22/10/10)