Stewart Investors Asia Pacific Leaders Sustainability Fund: August 2024 update

• David Gait and Sashi Reddy are seasoned investors with a long-term approach

• We like their focus on stewardship, sustainability, and high-quality companies

• They pay little attention to the benchmark and construct the fund using a ‘bottom-up’ approach

• This fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Stewart Investors Asia Pacific Leaders Sustainability fund aims to grow your investment over the long term by investing in high quality companies that mainly operate in the Asia Pacific region such as India, Taiwan, Australia and China. Unlike their benchmark, the managers also invest in Japanese companies too.

We think the fund could be used for broad exposure to Asia or to diversify a global investment portfolio. Investments in emerging markets add risk and the associated volatility should be considered when constructing a long-term portfolio.

Manager

David Gait is a seasoned investor and has been lead manager since 2016. He joined the company as a graduate in 1997 and has built up a wealth of experience and played a crucial role in developing their Asian investment strategies.

Sashi Reddy serves as deputy manager and joined Stewart Investors back in 2007, where he initially offered analysis and research support to portfolio managers, mainly concentrating on Indian companies.

Reddy and Gait receive support from a close-knit team of other fund managers and analysts. Both managers sit on the Stewart Investors Board and manage other funds alongside this one. We believe they can comfortably handle these responsibilities given the overlap in approach and supportive team dynamic.

Process

The investment approach at Stewart Investors has been grounded in the same philosophy since 1988. This philosophy is built on stewardship, where fund managers treat investors' capital as their own and strive to grow wealth over the long term while minimising losses during periods of uncertainty.

‘Quality’ is a broad term in the investment world but for the managers at Stewart Investors it centres around three key pillars: management, franchise, and financials. They are hunting for companies with robust financial strength and sustainable growth prospects.

They put great emphasis on the people and culture within businesses, only choosing to invest in companies led by management teams they trust and deem to have integrity. Many of the companies they own also still have a degree of founding family ownership.

The team pay little attention to the benchmark and construct the fund using a ‘bottom-up’ approach – this means they focus on the prospects for individual companies rather than making decisions based on wider economic events.

Currently they invest in 37 companies which means the portfolio is quite concentrated. That means each company can have a significant impact on performance, although it’s a higher-risk approach. Compared to its benchmark, the fund invests more in sectors like technology, healthcare, and consumer staples. In contrast, less is invested in financials, industrials, and communication services.

As the word ‘leaders’ in the fund name suggests, large and medium-sized companies are the primary focus with companies typically requiring a market capitalisation of at least $1bn.

Geographically, the managers invest a lot more than their benchmark in India which currently accounts for around 39.0% of the fund. Moreover, China only accounts for around 8.6% of the fund which is a meaningful underweight. Whilst their benchmark has no exposure to Japan, the managers have found an increasing number of high-quality companies here that carry out most of their business within Asia. To invest more in Japan and provide additional flexibility, the fund is in the IA Specialist sector.

When making investments, the managers adopt a long-term perspective and are prepared to be patient. Over the past 12 months, they purchased three Samsung businesses: Samsung C&T, Samsung Biologics and Samsung Electronics. Previously, these investments were avoided due to governance concerns but ongoing improvements and a commitment to long-term business building has changed their opinion.

Unusually for a Stewart Investors fund, the managers quickly bought and sold Chinese Healthcare company, WuXi Biologics due to increased regulatory risks that fundamentally altered their view of the business. Other notable sales included Australia technology company, Altium which was acquired at an attractive premium and Indian financial company, HDFC Life with the proceeds being invested in more attractive opportunities across the region.

Culture

We think the culture and philosophy that has evolved at the group over the years is attractive. The team doesn't put personal gain ahead of its investors and looks for companies that treat their customers in a similar way. It also places emphasis on recruiting and maintaining great people. Every manager and analyst advocates the team's overriding philosophy.

Stewart Investors forms part of First Sentier Investments, which was acquired by Mitsubishi UFJ, a Japanese bank, in 2019. Takeovers can sometimes lead to disruption and corporate change, though positively Stewart Investors remains an independent investment team.

ESG Integration

For the team at Stewart Investors, Environmental Social and Governance (ESG) considerations are much more than a label or box to be ticked. Taking these factors into account is a natural extension of the same investment process they’ve used for decades. The team’s philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and want to make sure it’s run in a way that’ll benefit all shareholders.

ESG issues form a core part of this. For example, they don’t like companies that make reckless decisions in the pursuit of short-term gains, rather than focusing on longer term, more sustainable growth. A business shouldn’t exploit its workforce, take advantage of tax loopholes, or skirt around industry legislation. Importantly, it should cause little, if any, harm to the environment around it. Stewart Investors has made a firm-wide commitment not to invest in companies whose primary business is to make cigarettes (or other tobacco products), or controversial weapons.

The team also engages closely with company management. It helps them make sure management remain on track with sustainability initiatives and means they can encourage a change in behaviour if required. If they don’t think a business meets their standards, or is doing enough to address a problem, they won’t invest. They produce an annual Responsible Investment report, and a Stewardship report. These reports outline the firm’s voting record, provide engagement updates and case studies, and present other ESG-focused research.

Cost

This fund has an ongoing annual charge of 0.85%, but we've secured HL clients an ongoing saving of 0.05%. This means you pay a net ongoing charge of 0.80%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies, except in the HL Junior ISA, where no platform fee applies.

Performance

Gait has built up an impressive track record over his career and significantly outperformed the broader Asia Pacific stock market. Since he was appointed lead manager of this fund in 2016, the fund has returned 84.72%* versus 77.07% for the MSCI AC Asia Pacific ex Japan index. As always, past performance isn't a guide to future returns.

The managers’ focus on quality companies and a more conservative investment style means the fund has tended to hold up better when the Indian stock market has fallen but hasn’t quite kept up when it rises. This has led to an attractive performance profile over the long run.

Over the past 12 months, the fund returned 10.39% versus 13.69% for the index. Investing more in India over the period was helpful for performance with their largest investment, Mahindra & Mahindra, the Indian conglomerate adding significantly to returns. The Taiwanese semiconductor giant, TSMC was also one of the top performers, however having less invested here than the benchmark hurt relative performance.

Investors should be aware that this fund is invested quite differently from the broader market, largely due to its significant overweight to India and much lower exposure to China. Therefore, its performance profile can look rather different from the benchmark.