Quality focus at TD Asian Growth Fund

Positioned for Asia turnaround

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 of November).

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 confidence.”

“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 expectations.”

“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.”

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

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