The Briefing: Asia Pacific excluding Japan

When you consider the roll call of household names that call Asia their home, such as Samsung and Kia Motors, you begin to understand the enthusiasm for committing money to what is one of the world's fastest-growing regions.

Further cause for optimism lies in the strong performances of funds that invest in such companies. In fact, the average fund in the IMA Asia Pacific excluding Japan sector has returned an average of 319.09% over the past decade, according to Morningstar data compiled to 4 March 2013.
This puts the sector fourth out of 35 rivals - beaten only by IMA Global Emerging Markets (362.58%), IMA European Smaller Companies (336.51%) and IMA China/Greater China (322.24%) - and means investors who put their faith in it would have seen the value of their holding more than triple.

That is obviously a good return, but is there a darker side to this investment story? Should private investors be embracing Asia or approaching it with a degree of caution?
Those who are pro-Asia argue that it's a far more attractive prospect than the West because it's growing strongly and isn't saddled with the same high debts. Add in the diversity provided by a range of countries at different stages in their development, they say, and it's an enticing prospect.

Others warn that you can't have such upside potential without risk. They point to governance and political risks, and the fact that the various markets making up this sector are small and therefore at greater risk of fluctuations in capital flows that can cause volatility.
Neil Mumford, a chartered financial planner at Milestone Wealth Management, is aware of these risks but argues that investors must not ignore the region. Dedicating at least a proportion of their assets to the region, he suggests, can reap rewards over the longer term.
"It gives people exposure to the largest manufacturing and exporting region in the world," he says. "Asia is home to some of the world's fastest-growing and largest companies, and many Western companies are now investing heavily to expand into Asia."

Greater risks

Patrick Connolly, a chartered financial planner at AWD Chase de Vere, agrees that Asia is an increasingly important part of the world economy and that its nations have less debt, but he warns of other difficulties. He says: "They have their own problems, including high levels of inflation, political risks and the knock-on effect of a slowdown in other parts of the world." He adds, however, that this doesn't mean it should be shunned.
According to Geoff Penrice, a chartered financial planner at Astute Financial Management, we are seeing a long-term shift of economic power to the developing economies of Asia. Chasing greater investment returns there comes with greater risks, but he believes it's a gamble worth taking. "I would recommend all but the most cautious investors to have some exposure to this sector," he says. "The higher the investor's risk tolerance, the more exposure they should have."
The IMA Asia ex-Japan sector is for funds that invest at least 80% of their assets in Asia Pacific equities and exclude Japanese securities. The region's companies have interests in countries such as China, Korea, Singapore, India, Australia, Thailand and the Philippines.
For the general investor, it pays not to be too country specific, advises Mumford: "I would suggest investors choose a geographical fund to gain access and leave the fund manager to decide what countries, regions, sectors and percentages they should hold."
There are currently 75 funds in this sector, so the first job is whittling this number down. Some investors will go for Asian giants, such as Samsung, while others will pursue growth-oriented strategies or will look for value. There's a lot of diversity in this region.

Smaller names

You could opt for a fund that backs firms you probably won't have heard of in the hope that these will deliver bumper returns. It’s a strategy that would have served you well in recent years, particularly if you had backed Aberdeen Global Asian Smaller Companies fund.
This fund, which has been the best performer in the sector over one, three and five years, has just over 100 holdings. Almost 23% of its assets are in the 10 biggest names. Its largest exposure is to Bukit Sembawang, a Singapore property developer, which accounts for 2.8%. Other names on this list include United Plantations, a Malaysian business focusing on the cultivation and processing of palm oil, coconut and other plantation crops in a sustainable way, and Tisco Financial, which was established in 1969 as the first investment bank in Thailand.
Funds focusing on smaller names have done very well in recent years, but there is only a handful of them in this sector.
Darius McDermott, managing director of Chelsea Financial Services, says: "Smaller companies may outperform over a longer period, but they are riskier and less liquid, and they tend to get much worse hit in times of stress."
He suggests, instead, looking at funds with value strategies, as they tend to perform well, particularly in difficult markets. He singles out First State and Aberdeen as two such investment houses.
"Within value, you tend to get slightly more defensive, better-quality companies that tend to pay dividends," McDermott adds. "Corporate governance is important, as is companies delivering what they promise and not being controlled by large family shareholders. These are all issues you have to be a bit more careful about in emerging areas."