British investors have been sending off their money in search of eastern riches for centuries. But funds investing in these far-flung economies have not always enjoyed the greatest success.
In the 17th century, China and India were the world’s leading economic powers. According to Sean Harkin, writing for World Finance, they may have accounted for 60-70 per cent of global economic output at that time.
However, in the era of western industrialisation that followed these Asian giants stagnated, as they failed to modernise and were disrupted by European colonial interference.
According to the IMF, by 2008 the whole of Asia controlled just 21.7 per cent of world financial assets, compared to 38.4 per cent controlled in Western Europe and 26.3 per cent in the US. In other words, a region with a population of some 4.2bn people controls a smaller share of world financial assets than does a single country with a population of 316m.
It is this imbalance that has driven Asian growth in recent decades, as economic reform has paved the way for vast new middle classes to build wealth for the first time.
The high levels of economic growth that have resulted from this change have attracted fresh attention from developed-world investors, leading to an explosion of Asian investment funds into the UK retail market.
Beyond Japan
Today, there are 206 open-ended funds targeting Asian markets listed in the Investment Management Association fund universe, and another 32 investment trusts listed by the Association of Investment Companies.
Asian investment funds are broadly separated by whether or not they invest in Japan, one of the few developed markets in Asia along with South Korea, and home to the third largest economy in the world.
There are nine Asia Pacific including Japan funds in the IMA’s open-ended fund sector for the region. These include the largest fund of its kind, the Matthews Asia Asia Dividend fund, with £495m under management.
But appeal for Asia funds that include Japan is limited. Even the oldest fund in the sector, the 35-year old Aberdeen Asia Pacific & Japan Equity fund, has just £196.7m under management.
Investors who turn to Asia tend to focus on the opportunity for rapid growth that is afforded by the region’s vast range of emerging markets, and it is this thirst for developing-market opportunities that is behind the enormous success of Asia Pacific excluding Japan funds.
The IMA’s sector for the funds contains 92 vehicles, including the two biggest products of their kind: the £8.4bn Templeton Asian Growth fund and £7.3bn First State Asia Pacific Leaders fund.
The latter was launched in 2003 as an alternative to First State’s successful Asia Pacific fund, managed from launch in 1995 by Angus Tulloch, which was forced to ‘soft close’ to new investments in 2003.
Capacity constraint
From its launch to 7 October 2014 the original Asia Pacific fund gained 801 per cent, making it one of the best-performing investment products of all time. However, like other funds targeting emerging markets, when it started growing in size as investors recognised its potential it came up against a problem; capacity constraint.
