Global markets pulled back during September on concerns that central banks, most notably the US Federal Reserve (Fed), may raise interest rates further. Although the Fed kept policy rates on hold at 22-year highs of 5.25- 5.50% during September, it left the door open for another rate hike later this year. Fed officials also indicated that rates could stay higher for longer throughout 2024 than they had previously anticipated. Confirmation of potential further upside in interest rates led to a spike in US10-year yields to a 17 year high of 4.8%. The USD also rallied by ~2.5% during the month. Historically, a stronger USD has been negative for flows into Emerging Markets and indeed this was a headwind throughout September. All Asian indices, with the exception of India (+1.5%) and Philippines (+2.4%) were down last month including MSCI China (-3%), Korea (-3.5%) and Taiwan (- 1.7%).
The Indian market performance is notable given it has outperformed most major indices over the past 3 months despite a~30% rally in the oil price. India imports ~80% of its oi requirements, so a higher price is typically negative for the current account balance and a potential headwind for economic growth. The resilience of Indian equities, however, has been driven by a number of important factors. First, is robust domestic demand with indicators such as PMI (60.9 in September) and credit growth (+15% yoy in September) pointing to a healthy economic environment. The second is India’s ability to purchase cheap Russian oil, albeit this discount has narrowed in recent weeks. This along with solid tax collections (+12% yoy in the past 12 months) has helped fund a lift in government capex (+48% yoy in FY24YTD). Finally, strong inflows from foreign investors have helped to support the Indian market.
What is Ellerston Asia Growth Ellerston Asia Growth is an Managed Funds investment product that is benchmarked against World Emerging Markets Index and sits inside the Foreign Equity - Asia ex Jap Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The Ellerston Asia Growth has Assets Under Management of 11.21 M with a management fee of 1%, a performance fee of 0.30% and a buy/sell spread fee of 0.5%.
How has the investment product performed recently?
The recent investment performance of the investment product shows that the Ellerston Asia Growth has returned -1.35% in the last month. The previous three years have returned -8.49% annualised and 12.07% each year since inception, which is when the Ellerston Asia Growth first started.
How is risk measured in this investment product?
There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since Ellerston Asia Growth first started, the Sharpe ratio is 0.14 with an annualised volatility of 12.07%. The maximum drawdown of the investment product in the last 12 months is -6.88% and -34.85% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.
What is the relative performance of the investment product?
Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The Ellerston Asia Growth has a 12-month excess return when compared to the Foreign Equity - Asia ex Jap Index of -0.98% and -3.35% since inception.
Does the investment product produce Alpha over its Peers?
Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. Ellerston Asia Growth has produced Alpha over the Foreign Equity - Asia ex Jap Index of -0.13% in the last 12 months and -0.25% since inception.
What are similar investment products?
For a full list of investment products in the Foreign Equity - Asia ex Jap Index category, you can click here for the Peer Investment Report.
What level of diversification will Ellerston Asia Growth provide?
Ellerston Asia Growth has a correlation coefficient of 0.96 and a beta of 0.88 when compared to the Foreign Equity - Asia ex Jap Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.
How do I compare the investment product with its peers?
For a full quantitative report on Ellerston Asia Growth and its peer investments, you can click here for the Peer Investment Report.
How do I compare the Ellerston Asia Growth with the World Emerging Markets Index?
For a full quantitative report on Ellerston Asia Growth compared to the World Emerging Markets Index, you can click here.
Can I sort and compare the Ellerston Asia Growth to do my own analysis?
To sort and compare the Ellerston Asia Growth financial metrics, please refer to the table above.
Has the Ellerston Asia Growth been independently verified by SMSF Mate?
This investment product is in the process of being independently verified by SMSF Mate. Once we have verified the investment product, you will be able to find more information here.
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Comments from SMSF Mates
SMSF Mate does not receive commissions or kickbacks from the Ellerston Asia Growth. All data and commentary for this fund is provided free of charge for our readers general information.
Performance Commentary - August 31, 2023 Global equities pulled back in August as positive economic data, particularly from the US, revived investor concerns that central banks would need to further tighten monetary policy. Asian markets were relative underperformers with the MXASJ (in USD) down 6.6% compared to the MSCI World and S&P500, which was down 2.6% and 1.8% respectively. Within Asia, China was the worst performer with the MSCI China index down 9% during the month.
Chinese equities were weighed down in August by a spate of soft economic data. The most notable data point was headline CPI of -0.3%, which confirmed China was in deflationary territory. This led to investor concerns that China was heading for a debt deflation spiral akin to what Japan experienced during the 1990s. Although overall leverage in China is high (debt to GDP of ~300% in 2022) and demographics are weakening, we believe that ‘Japanification’ can be avoided due to a number of reasons. Firstly, China still has meaningful growth potential driven primarily from productivity gains. Secondly, there are no signs in China of an asset price bubble similar to what Japan experienced in the 1980s that could trigger a forced deleveraging event. Finally, Chinese policy makers have tools at its disposal to reflate the economy and keep real GDP growth above real interest rates. So whilst the pace of policy action in light of a slowing economy has so far have been disappointing, we continue to expect supportive countercyclical policies to be announced over the coming months.
Performance Commentary - July 31, 2023 It was another solid month for global equities in July, driven by further evidence of moderating inflation and better than expected earnings out of the US. Asian markets, however, were relative outperformers with the MXASJ (in USD) up +5.7% compared to the MSCI World and S&P500, which were up +3.3% and 3.1% respectively. Within Asia, China (MSCI China +9.3%) and South East Asian markets such as Malaysia (Bursa +6.0%) and Singapore (Straits Times +5.0%) were the standouts.
The outperformance of China was driven by positive sentiment following a Politburo meeting held during the month. Within this meeting, policymakers acknowledged that the economy currently faces challenges and pledged more countercyclical easing measures in order to revive demand. Sectors that were singled out for further stimulus included property, infrastructure. consumption (auto, home appliances, electronics, sports/leisure and tourism) and capital markets. We are cautiously optimistic on the prospects of tangible policy action (rather than just rhetoric) in the coming weeks, and this is reflected in our positioning, with China/HK representing -48% of the portfolio.
Performance Commentary - June 30, 2023 Global equities performed strongly in June driven by moderating inflation, the prospects of an economic soft-landing in the US and euphoria around the artificial intelligence thematic. Asian marketswere relative underperformers with the MXASJ (in USD) up +2% compared to the MSCI World, which was up +6%. Within Asia, China (MSCI China +3%) and India (NSE500 +4%) led the way. We remain positive on the outlooks for both the Chinese (>5% GDP growth in 2023) and Indian (6% GDP growth) economies and this is reflected in our positioning, with these two markets representing —60% of the EAFZ portfolio.
On China, a number of fiscal and monetary stimulus measures have been announced in recent weeks to address the sputtering economy. Specifically, the PBOC cut key interest rates by 10bps during June. Meanwhile, the Government announced debt relief for property developers, support for home appliance consumption and extension of tax breaks on electrical vehicle (E14 purchases. We expect further supportive policies to be rolled-out in the coming months, particularly in theconsumptionand property sectors. This will likely drive the second phase of China’s post-COVID recovery. As such, we see any weakness in Chinese equities as an opportunity to accumulate high quality companies trod i ng at attractive valuations.
Performance Commentary - May 31, 2023 EAI was down 1.0% (net) in May versus the MSCI Asia ex Japan (MXASJ) Index which was flat for the month. Meanwhile, EAGF was down 0.8% (net). As the strategy enters a new phase of its lifecycle, we believe it would be appropriate to provide an overview of EAFZ’s philosophy and current market outlook, portfolio positioning and significant positions.
Positioning and Significant Positions At a regional level, we are currently most positive on Chinese and Indian equities due to the world-leading growth that both economies are forecast to achieve in the coming years. These two markets account for —57% of the EAFZ portfolio. At a sector level, we have taken a barbell approach to portfolio construction with a large weighting towards quality growth names in the technology and consumer sectors as well as exposure to interest rate sensitive names in the financials sector. We believe that these three sectors provide the best exposure to the structural growth drivers that was highlighted earlier such as demographics, technology leapfrogging and innovation, rising middle class and capital market liberalisation.
Performance Commentary - April 30, 2023 Ellerston Asia Growth Fund (EAGF) was down 1.97% (net) in April versus the MSCI Asia ex Japan (MXASJ) Index which was down 0.87%.
Volatility eased in April particularly in developed markets as expectations that global central banks are at the tail end of their respective hiking cycles and a better than feared reporting season in the US eased market concerns. Despite the recent respite, global market sentiment remains fragile given ongoing concerns around the regional banking system and debt ceiling deadline in the US and lingering recession fears in both the US and Europe.
Asian markets underperformed developed markets during the month dragged down by Chinese equities. This was despite the release of better-than-expected 1Q23 GDP growth (+4.5% YoY) and retail sales (+10.6% YoY) data along with improving property activity (sales +4.1% YoY in 1Q).
The underperformance of Chinese equities since January despite growing evidence of economic cycle divergence between China (accelerating) and the US and Europe (slowing) has been surprising. It is apparent that the wall of worry for investing in China remains high. We however believe that the vectors of uncertainty with regards to Chinese equities have gradually been removed. Indeed over the past 6 months, the Chinese Government has abandoned zero-COVID, eased regulatory restrictions, provided stimulus for the property sector and maintained a supportive monetary policy environment.
Importantly, these catalysts have started to translate into positive economic data and corporate earnings growth. Yet despite these positive developments, MSCI China continues to trade at the same multiple as it did back in December last year of 10.3x forward PE and 1.2x PB. These depressed valuations compare favourably to forecast earnings growth for the market of ~15% over the next 12 months and low teens ROE.
Performance Commentary - March 31, 2023 Ellerston Asia Growth Fund (EAGF) wasup 3.25% (net) in March versus the MSCI Asia ex Japan (MXASJ) Index which was up 4.0%. March was a volatile month for global equity markets with the banking turmoil in the US and Europe weighing on returns early in the month, followed by a strong rebound after measures to stabilise the financial sector were announced.
Performance Commentary - February 28, 2023 The Ellerston Asia Growth Fund (EAI) was down 3.8% (Net) in February versus the MSCI Asia ex Japan (MXASJ) Index, which was down 2.7%. Asian markets, led by Greater China, were weak in February, giving back some of the January gains. China’s reopening story softened with the rise of political tensions between US and China. The revised market expectation of US interest rates staying “higher for longer” likely triggered the global risk off which got further accentuated in Asia due to increased geopolitical tensions. However, the overall market sentiment in EM remained good with continued fund inflows from both active and passive mandates.
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