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Investment comment: why I’m not worried about First State

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Investment comment: why I’m not worried about First State

I must admit to being surprised by the news which greeted my Monday morning coffee and I can’t be alone.

Two of the pre-eminent fund managers in Asia Pacific and Global Emerging Markets equities are set to hand over the reins of their strategies. To a certain extent Angus Tulloch (pictured) is less of a shock, he has spent many years at the coal face and established himself as the authority on Asian equities, a less intensive role is no more than he deserves.

But Jonathan Asante, was from the outside looking in, the heir apparent to the business which Tulloch built. The hire of Asante from AXA Framlington in ‘07 was seen as a major coup for First State and while he has spent more than 15 years as a named manager, he is many years Tulloch’s junior.

So why am I not worried?

After all this is a company which has recently split in two, with Stewart Investors who manage, among others, their Asia PacificGEM and Indian Subcontinent funds, parting ways with their office in Hong Kong, now First State Stewart Asia; which runs the Scottish Oriental Investment trust and Greater China Growth fund.

There are two reasons to be sanguine, firstly Tulloch and Asante are going nowhere, merely stepping back and the second is David Gait.

A few years back I visited the offices of First State in Edinburgh and spent a day with their fund management team.

I sat in on their weekly conference call to Singapore and Hong Kong, where all of the fund managers and analysts discussed the most pressing issues with the stocks in their mandates and the ones they were looking at.

Moreover, I saw the forum in which the ideas of the junior analysts were tested and justified. The senior managers would run the rule over the model portfolios the analysts were running. Not only that, but all of them would have a say in the pooled vehicle into which each manager and analyst contributes their own money.

This is very much to ensure that the philosophies and decision making processes of their selections are passed on to their successors and co-managers.

Who is David Gait?

Some of you may not be aware of David Gait, but he has been lead manager on the group’s Asia Pacific Sustainability range since December ’05 and is also the lead manager on their extremely successful Indian Subcontinent and GEM Sustainability funds.

The reason you may not be aware of him, is that, for many years, his funds have been soft-closed to new investment. However, his track record in Asian equities is outstanding and he is one of only two managers to outperform Tulloch since taking over the fund nearly 10 years ago; with his returns of 205% only bettered by Value Partners Cheng-Hye Cheah’s 208% return on the Value Partners High Dividend.

India is the key

One of the reasons that this is such a good fit is because the Leaders fund is currently running its highest ever allocation to India; a three times overweight benchmark position of 25.2%.

As with Tulloch and Asante in Asia Pacific and GEM respectively, Gait and co-manager Sashi Reddy are arguably the best fund manager team in Indian equities, while they don’t have the track record of Tulloch, no one in Indian equities really does.

It’s tough to imagine that 25% position hasn’t been significantly influenced by Gait and Reddy and it is the largest positive contributor to the performance of the Leaders fund over the past few years.

However, the leaders fund is far from an identical beast. The first and major difference between the two is the scale.

The Sustainability fund is a shade more than £300 million, while the Leaders fund is gargantuan at £7.5 billion. This significantly reduces the investment universe which Gait can invest in and find these sustainable enterprises, they must be big and highly liquid companies.

This alone might put a dampener on their plans to move the Leaders fund to a sustainability fund over time, the universe might simply not be there.

Global Emerging Markets

While I am comfortable with the changes in the Asia Pacific team, those in GEM are certainly more eye catching. Tom Prew is set to take over, along with Ashish Swarup whom they poached from Fidelity in the middle of last year. During his tenure at Fidelity between November '11 and June '14, Swarup enjoyed a barnstorming run on his US domestic only fund, returning 34.8% versus a 13.7% gain for the index.

Outperformance in global emerging markets is extremely rare and the duo only have a combined experience of seven years as named manager. With Asante there in the background advising them I think you can be confident that performance will not fall off a cliff. But it is certainly harder to recommend.

The big question though is where else would you go? The major competitors are mostly closed to new investment and passive options have historically always struggled in this sector. Any manager delivering benchmark returns is therefore doing a good job and I’d be pretty confident that they’ll manage to do that.

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