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FSM Fund Choice: Eastspring Investments Asia Select Income Fund [May 2017] May 2, 2017
In this article, we will present some of our factual findings on the "Sell in May and Go Away" financial adage, together with brief updates on our favourite market - Asia ex-Japan equities, and lastly how investors could tap into the opportunities residing within the region via this month’s fund choice - Eastspring Investments Asia Select Income Fund.
Author : Tan Wei Yine


FSM Fund Choice: Eastspring Investments Asia Select Income Fund [May 2017]

On aggregate, global equities have continued to exhibit encouraging performance for the month of April entailing a decent upward march from 1Q2017, as most of the economic data remained positive, plus lesser worries from France’s political front (see Figure 1). As we move towards May, it is the time of the year again where we see more mentions of the financial adage “sell in May and go away” from market speculators and some investors may be concerned with the validity of the saying.

FIGURE 1: Equity markets' performance over April 2017.

In this article, we will present some of our factual findings on the above mentioned financial adage, together with brief updates on our favorite market - Asia ex-Japan equities, and lastly how investors could tap into the opportunities residing within the region via this month’s fund choice - Eastspring Investments Asia Select Income Fund.

Sell in May and Go Away? History Disagrees

For investors who are unfamiliar with the financial adage, it is based on an explanation that fund managers in the West square their positions in May before going for summer holidays, which may cause a seasonal decline in the equity markets. With the saying, some sources actually concluded that returns over the winter period (November - April) are generally better than that of the summer period. Some investors find this strategy more rewarding than staying in the equity markets throughout the year.

We have decided to conduct a study based on historical data over various periods. To our findings, the average returns for the winter periods have performed better than those within the summer periods (see Table 1). However, the average return across the summer periods were mostly in the black as well, which means that investors who invest throughout the year may perform better than those who solely invest in the winter period (see Table 2). As such, we find little coherence from historical data to the financial adage “Sell in May and Go Away”.

Table 1: Returns data for various indices over the past 20 years.

 
Index
Summer Average Return
Winter Average Return
5-Yr (%)
10-Yr(%)
15-Yr(%)
20-Yr(%)
5-Yr (%)
10-Yr(%)
15-Yr(%)
20-Yr(%)
S&P 500 Index
4.9
1.4 1.3 1.0 6.8 5.9 4.3 5.1
STOXX 600 Index 2.7 -0.7 0.5 -0.4 5.9 4.7 4.4 6.2
MSCI Asia ex-Japan Index 3.4 3.3 5.0 0.8 5.5 7.8 8.4 7.7
MSCI Emerging Markets Index 3.1 2.3 4.8 0.1 4.5 7.8 9.2 9.3
FBMKLCI Index 2.4 2.3 3.9 -0.7 4.5 6.8 7.3 8.7

Source: Bloomberg, iFAST compilations. Data as of 26 April 2017. Returns in local currency terms with any dividends reinvested.
Summer Return: Buy in May Sell in October | Winter Return: Buy in November Sell in April

Table 2: Cumulative returns comparison.

 
Index
Summer Average Return
Winter Average Return
5-Yr (%)
10-Yr(%)
15-Yr(%)
20-Yr(%)
5-Yr (%)
10-Yr(%)
15-Yr(%)
20-Yr(%)
S&P 500 Index
38.1
74.3 81.6 145.8 90.0 99.8 200.9 307.8
STOXX 600 Index 31.1 53.0 80.8 189.2 78.1 42.1 120.3 244.6
MSCI Asia ex-Japan Index 29.7 104.2 213.4 264.2 30.7 62.0 295.5 153.8
MSCI Emerging Markets Index 24.1 105.2 257.0 406.1 9.5 31.3 310.9 200.8
FBMKLCI Index 24.3 88.2 174.6 327.6 31.4 84.5 257.5 187.6

Source: Bloomberg, iFAST compilations. Data as of 26 April 2017. Returns in local currency terms with any dividends reinvested.
Highlighted in Yellow indicates outperform.

The above findings have led us back to our core investment principals, which advocate investors to adopt a portfolio approach when it comes to investment strategy, and remain adhered to their medium- to longer-term investment objectives. In accordance to one of our recent writeups, although a portfolio approach may not be able to generate the best returns as compared to those who solely invest in an outperformed asset class, it has been able to generate better risk-adjusted returns over the long run for investors.

See: The Merits of Portfolio Approach

We Remain Upbeat on Asia ex-Japan Equities

At this juncture, leading economic indicators are still showing a decent landscape within the Asia ex-Japan region, which have prompted us to maintain our positive view on the associated equity markets. Exports data remains robust on the back of a higher commodity prices, and PMI figure remains at expansionary level (see Figure 2 & 3). Analysts have continued to show confidence in the earnings prospects of Asia ex-Japan companies, as earnings forecasts have continued to receive upward revision (see Figure 4).

FIGURE 2: Exports growth remain resilient, helped by higher commodity prices.
FIGURE 3: Manufacturing activities remain expansionary.
FIGURE 4: Analysts remain positive on Asia ex-Japan equities' earnings prospect.

Why Eastspring Investments Asia Select Income Fund?

About The Fund

Eastspring Investments Asia Select Income Fund is a balanced fund which aims to provide investors with a stable income stream, and at the same time furnish investors with growth opportunities via investing in a target fund – Eastspring Investments Dragon Peacock Fund (USD-denominated). Within the fixed income segment of the portfolio, the fund will primarily invest in Malaysian investment grade fixed income securities. The fixed income portfolio will be actively managed and the frequency of trading will depend on market opportunities and the assessment of the fund manager.

Table 1: Returns across various period.

Asset Class
% of Fund's Nav
Eastspring Investments - Dragon Peacock Fund Maximum 40%
Fixed Income Securities Remaining of the fund's NAV
Liquid Assets Minimum 1%

Source: Fund prospectus 2016, iFAST compilations.

As for the target fund, Eastspring Investments Dragon Peacock Fund primarily invests in equities that carry significant business or derive most of their revenues from China or India. The management team utilises a proprietary screening methodology that prioritize valuation outliers, which may become investment candidates. The next step would be fundamental analysis, where the management team undergoes a series of challenges and debates to contest the investment assumptions to help achieve a level of conviction in the valuation results. Lastly, in the process of portfolio construction, the manager takes into account of the correlation between the stock holdings to ensure sufficient diversification. The management team also places emphasis on peer reviews and team-owned responsibilities to ensure the integrity of the investment process.

Under normal circumstances, Eastspring Investments Asia Select Income Fund does not engage any currency hedging strategy in mitigating the currency risk between US Dollar and Malaysian Ringgit. However, the fund manager may choose to use forward or option contracts for hedging and risk reduction purposes when deemed necessary.

Resilience Performance

FIGURE 5: Indexed performance over the past 3 years.

Although Eastspring Investments Asia Select Income Fund has exposure towards both China and India’s equity markets, which are known for their volatilities, the fund has still managed to deliver resilience performance over the past 3 years (see Figure 5). Also, the fund has also consistently outperformed its benchmark, with exception to the 5-year period.

Table 4: Fund's performance against benchmark.

Fund/Index
6-mth(%)
1-Yr(%)
3-Yr*(%)
5-Yr*(%)
Eastspring Investments Asia Select Income Fund 6.9 17.2 10.6 8.0
Benchmark 5.2 14.8 10.0 8.1

Fact sheets, iFAST compilations. Data as of 31 March 2017. Returns in MYR terms with dividends reinvested.
Benchmark:20% MSCI China Index + 20% MSCI India Index + 60% Quant Shop MGS Medium Index.
*Annualised

Apart from delivering consistent returns, the fund has also delivered better risk-adjusted returns, as portrayed by its Sharpe ratio (see Figure 6). Besides, we have also taken a glance on the target fund’s performance, which has also shown decent performance against its benchmark (see Table 5).

FIGURE 6: Volatility and Sharpe ratio.

Table 5: Target fund's performance against benchmark.

Fund/Index
6-mth(%)
1-Yr
3-Yr*
5-Yr*
Eastspring Investments Dragon Peacock Fund 11.2 26.0 9.4 6.0
Benchmark 7.7 19.0 7.6 6.1

Bloomberg, iFAST compilations. Data as of 31 March 2017. Returns in USD terms with dividends reinvested.
Benchmark: 50% MSCI China Index + 50% MSCI India Index
*Annualised

Taking A Balanced Approach

Within the Asia ex-Japan region, we are also positive on the growth prospects of the two major economic engines within the region - China and India. However, investors with moderate risk profiles may be hesitant to allocate part of their portfolios into these equity markets, as the attractive growth potentials comes along with great volatility. The Eastspring Investments Asia Select Income Fund therefore presents a channel for moderate investors to gain some exposure to both Chinese and Indian equity markets, without directly allocating a huge chunk of their portfolio towards the aforementioned equity markets. The equity exposure will be capped at 40%, and the local fixed income exposure will be acting as a stabilizer, reducing the overall volatility of the fund. As we see limited downside for the Ringgit, the local fixed income exposure will also be able to provide some cushion to the currency translation risk, should there be any sharp upward movement of the Ringgit against the dollar.

CONCLUSION

All in all, we reject the saying of “Sell in May and Go Away”, as we find little factual support from historical data. While we disagree with the financial adage, we understand that some of the investors may be still inclined to give it a shot. For investors that are considering to reduce some of their equity exposures, they may consider investing into this month’s fund choice - Eastspring Investments Asia Select Income Fund, which allows them to trim down some of their equity exposures via shifting into the local fixed income segment, while staying invested in two of the largest economic engines within the Asia ex-Japan region to capture the underlying growth opportunities residing within these equity markets.

 


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