Disciplined approach to stocks pays dividends
Asian equities were re-rated last year following their generally wider acceptance in global markets.
Investor attitude towards the mainland's booming economy - which was overly optimistic - also underwent a well needed reality check towards the end of the year.
'To some extent the whole China growth story became better understood,' said Gregory Kuhnert, fund manager of the Investec Asian Equity Fund at Investec Asset Management in London. 'I think the risk appetite was very high and became more comfortable with the decoupling of growth in Asia.
'Certain markets in Asia entered bubble-like territory last year,' Mr Kuhnert said. 'In China, there was a failure to realise that the fundamentals were elevated, and this sent the market up.'
Investec's Asian Equity fund returned 53.8 per cent last year against 36.5 per cent for the Morningstar Capital Index.
'Our performance was not a one trick pony,' Mr Kuhnert said. 'We did well in a number of companies and a number of sectors but, practically speaking, it was down to very strong performance in industrial stocks such as materials, mining, construction and engineering, and also transport and real estate stocks.'
The fund also had excellent performance over the long haul.
'We are completely bottom up-driven stock pickers. We have a disciplined stock screening process. We screen based on four things - valuation, quality, technicals and improving profitability.'
One key to the fund's success is its disciplined approach to asset management. This is reflected in how stocks are vetted for acquisition and when they are sold.
'Our four-factor process helps us determine which stocks to buy and which stocks to sell - stocks for which the investment case is weakening.'
The approach is at odds with the way many funds in Asia are managed.
'We think that having a disciplined process in Asia is an advantage in a region where there is not strong discipline,' Mr Kuhnert said.
'In Asia it varies. There are deep-value managers and you also get a lot of investors who trade on rumours and thematics, which is not necessarily bad, but the approach is not disciplined.'
Consistency is another important element in the fund's ongoing success.
'We have a defined investment process, and we stick to it. Since the inception of the four-factor strategy in March 2003 to [last] December, the fund returned a total of 411 per cent against 301 per cent for the index.'
Mr Kuhnert said that valuations were looking more reasonable this year.
'The market is off 15 per cent. In terms of where valuations are against where they were at the end of last year, they have gone from over-valued to fairly valued.'
Asia should weather the global economic storm. 'The risks to Asian growth have increased because the US is probably in a recession and Europe is slowing down significantly,' Mr Kuhnert said. 'However, the long-term structural growth story in Asia is still largely intact.'
The data coming out of Asia shows that it has become more resilient than people expected. Domestic consumption and investment are expected to play a big factor in driving growth this year.
'The long-term structural growth story gets down to those factors which will lead to the re-rating of Asian equities as an asset class and they include rising domestic consumption. That is driven by industrials in China and other parts of Asia and that is driven by global outsourcing. The second big driver is investment spending by government in infrastructure.'
The mainland market was driven by a lot of momentum. Things finally started coming back down to earth during the fourth quarter.
'While the growth was strong the valuation didn't make sense towards the end of the year. Even though the risk in the market in China grew towards the end of the year to extreme levels, risks to global growth also increased,' Mr Kuhnert said.
