I’ve long been mystified about why so many Asian investors are so pragmatic about political risk in the region. Arguably they’re just being sensible and sticking to my new investing motto which is ‘”ignore day to day politics”.
Investors should focus instead on core structural factors and not worry too much about referenda, bilious tweeting politicos or sociopathic tin pot dictators. But the recent ballistic machinations of North Korea do worry me mightily. And not for the obvious reason. I have a hearty hatred for this odious regime and believe that a military option should have been deployed in the past. If ever there was a candidate for a humanitarian neo con war, North Korea is it. Its leadership is truly despicable and should be dragged to the international courts for war crimes. But it also strikes me that despite my emotional preference for dishing out justice, we are now in an impossible situation which will result in the world having to come to terms with a nuclear North Korea. They aren’t giving up those missiles.
And I would also argue that the chances of a new war in the peninsula are low. On this sc, re we should listen to arch strategist Steve Bannon who recently confirmed the obvious – that there are no easy military solutions apart from millions dead. Also for Trump’s core isolationist supporters, a war with North Korea is everything they did NOT vote for. So, the world needs to find an accommodation with North Korea.
But there is a more worrying longer term trend. Trump will be sour, and will come to the conclusion that China did not ‘deliver’. It failed to stop the baddies getting a bomb. This will cause him to fret about what is, in reality, his core agenda – China. Or more precisely getting back at it. Bannon has also been clear about this and it strikes me that a series of tough statements about China is a no brainer for Trump’s core vote. Slap trade actions on the commies. Trip up their technology. Close markets.
This is bad structural stuff that should be factored in by Asian investors. We’re also going to be forced to deal with pressure from regional players such as South Korea and Japan to acquire their own nuclear deterrent. The bottom line – geopolitical tension in the region will intensify. Having just read Graham Allisons excellent book Destined for War (note the lack of a question mark on that book title), obviously I’m slightly more jaded than the average observer but it simply don’t see how these two super powers are going to be able to come a deal. Both sides have too much to lose and national hubris is too virulent.
How to invest in Asia if you ignore the ballistics
Anyway, enough of all this geopolitical scaremongering – this preamble brings me to Witan Asia. Like its bigger brother Witan, this a fund of fund which attempts to find great local managers and then puts its money to work over the long term. A key part of the funds USP is that it finds proper alpha seeking managers and this week came news that its dumping one (Gavekal) and scaling back on two others (Aberdeen and Matthews). In their place it’s bringing in Dalton Investments (who sound really interesting) and Robeco. This is excellent news as it shows that the board is being more active in picking active managers. It needs to be much more aggressive on this score and show why investors are paying for the fund selection process.
Better managers might also to deal with the “performance gap”. For right or wrong, I tend to compare Witan Asia with one of my own core holdings, Schroders Asian Total Return fund. The comparison isn’t flattering, although to be fair the latter fund excludes Japan whereas Witan includes Japan.
Over 1 year Witan is up 18.9%, while Schroders is up 37%. Over 5 years Witan is up 78%, Schroders 131%. Over 10 years Witan is up 128%, Schroders 184%. This performance gap is perhaps reflected in the 13.5% discount for Witan Asia and the 1% discount for the Schroders fund.
I think there are two core questions now. The first: what value is the fund adding? My guess is that most investors think very little. Which helps explain the discount which is around 13%. It needs to be much aggressive in its active approach. Frankly, I don’t want to see mainstream houses such as Aberdeen in its portfolio. I want to see it focusing exclusively on smaller, nimble, focused equity houses with outstanding track records.
The other question is whether its focus on Asia is right. For the reasons I have already discussed, I worry about the region. I also worry about why the fund includes Japan yet seems to be so underweight the country – what’s the point, why not just chop Japan from the mandate? More to the point why just focus on Asia? Why not switch to an emerging market focus globally? Find great funds that invest in Asia, Russia, Brazil and even Africa? Obviously, its bigger sibling Witan does invest in EM funds but it’ll only ever be a very small part of its focus – Witan Asia could be a real gem if it switched focus.