To say 2018 was mostly a bad year for equity funds would be an
understatement, and among the hardest hit were funds in the Greater China
and Asia Pacific ex Japan categories. For the one-year period ended
November 30, 2018, Canadian equity funds averaged a -4.6% return, whereas
Greater China equities averaged -9.1% and Asia ex Japan funds averaged
-9.0%. Those latter performance figures earned them 50th and 49th place
respectively among 55 fund categories (at the bottom of the list was
precious metals funds, with a return of -16.1% for the year through the end
Things turned around dramatically in November, however, at least in Asia –
average returns that month for China and Asia ex Japan funds were 6.1% and
5.5% respectively, vaulting them into first and second place in terms of
category performance (and without which those one-year figures would have
been far worse). So what’s been going on, and more importantly, where do we
go from here?
The natural inclination is to blame that downturn on the still continuing
tariff tiff between China and the U.S., but
Andrew Graham, head of Asia at Martin Currie Investment Management in Edinburgh,
Scotland, and portfolio manager of the
TD Asian Growth Fund, says there’s more to it than that. Given that he foresaw the downturn and
took evasive actions, he probably has as good an insight as anyone into
where it’s headed now.
“We have a strong quality bias – that’s a persistent style characteristic –
and there’s certainly an element of investment quality in that,” says
Graham when asked to explain the TD fund’s outperformance (a
best-in-Asia/ex-category 7.5% in November, an almost-best -7.2% on the
year, and a 10-year average annual compounded rate of return of 8.8% as of
Nov. 30, 2018). “But also, at the end of last summer we became concerned
about the outlook for earnings expectations. We began weeding out companies
with deteriorating earnings, and moving into stocks in which we had more
“The deterioration in earnings expectations has been rapid and quite
substantial, and it’s about more than Trump and China,” Graham adds.
“There’s been a global deceleration in economic activity. In 2017 the
consensus growth forecasts for Asia were about 15% for 2018 and 13% for
2019, but 2018 came in at 3%, and 2019 is expected to be 6%, so there’s
been a massive change in earnings expectations. That’s following very
strong growth in 2016 and 2017, so it’s had a big impact.
“We have looked at the ratio of upgrades to downgrades [in earnings
expectations], and the ratio has fallen downward to levels last seen back
in 2008 and, before that, in 2001,” says Graham. “We’re in a period of
quite significant stress, at a level that is actually consistent with
positive returns going forward. Valuations have pulled back, at least in
Asia, and the stage has been set for a strong improvement in returns over
the next 12 months. The underlying fundamentals do justify a rebasing of
“My job will be to preserve the quality characteristics [of the TD Asian
Growth Fund] while capturing some of that earnings growth,” Graham adds.
“We’re very much bottom-up in process, with selection driven by valuations.
Stylistically we’re in a kind of GARP [growth at reasonable price] bubble,
but depending on what’s going on, we will oscillate between value and
growth. The goal of the fund is to deliver attractive returns over the long
term, without sacrificing quality.”
is an experienced financial and business journalist and a frequent
contributor to the Fund Library.
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