DWS fund takes aim at deep-value in Asia

17 February 2009

DWS Investments – the retail investment arm of Deutsche Asset Management – has launched a new equities fund that aims to capture potential returns from undervalued Asian and Asia-focussed companies when global economies recover from the current turmoil.

The new DWS Asia Select fund comprises a portfolio of about 25 to 30 stocks, made up of mostly Asian companies such as Ayala Corp, City Developments, Singapore Airlines and Hong Kong-based conglomerates and property heavyweights such as Cheung Kong, Henderson Land, Hutchison, Jardine Matheson and Swire Pacific.

But there is also room for smaller cap firms such as VTech Holdings, a China-based maker of interactive children's toys and cordless phones. The only exceptions in the Asian-based portfolio are Christian Dior, Swatch, Nokia and Dell, which have significant exposure to Asian markets.

DWS fund managers has allotted 30% of the portfolio weighting to stocks in the property sector, 15% to domestic consumption, 12% to financials, 10% to technology with the rest to luxury goods, telecoms and companies with exposure to global or regional GDP growth.

Explaining the higher weighting for property, Ed Peter, Head of Deutsche Asset Management, Asia Pacific and Middle East noted, "We believe that when the time for recovery comes around, these companies – the property conglomerates and financials – will be the best proxies for the Asian GDP growth rebound."

"They are often the first to feel the pain from falling prices and rentals when there is a downturn but also the first to turn around, usually about six to nine months before the real economies hit their bottom. What leads us in, will leads us out of the downturn and it will usually be the stronger companies with diversified earnings base, better balance sheets and consistent cashflow," he added.

It's also for the same reasons that Singapore and Hong Kong/China have a combined weighting of 72% in the DWS Asia Select portfolio.


Said Richard Jones, Lead Fund Manager for DWS Asia Select, "These markets are well plugged into the global economy and are usually the first recover. They also have substantial scope for government stimulus given their solid fiscal and debt positions."

In addition to the fundamental strength of Asia's balance sheets – be they government, corporate or personal – DWS is also of the view that the longer-term prospects of Asia will surpass advanced markets as the region's vast population and burgeoning middle class are likely to be key drivers behind the next phase of sustained global expansion.

The current times is also an opportunity to buy undervalued shares of prime companies without having to pay a premium, as share valuations have rarely looked more attractive from a long-term perspective since many solid companies have suffered rating downgrades alongside weak companies.

ASIA EQUITIES (ex-Japan) – Price-to-book ratios at multi-decade lows

Given such an environment, Mr Jones said that the DWS strategy would be to sniff out stocks that are priced at a 40-50% discount to their intrinsic values.

"We believe that the reduction in earnings of Asia-focused corporates is only temporary. In constructing the value portfolio, we have considered important characteristics, such as low price-to-earnings and price-to-book ratios, sustainable business models, strong free cash flows, healthy balance sheets and a track record of consistent growth in earnings and dividend payouts."

"We think that this is a fertile environment to look for gaps between prices and value. Investors should be seeking to buy companies that are likely to be materially bigger in the future. That is, buying growth at value prices. We believe that as prices and intrinsic values converge over time, potential positive returns could be realised," Mr Jones added.

Mr Peter pointed out that based on the evidence from past global market slumps dating as far back to 1892, the bulk or about 80% of the returns upon recovery had come from value investing. "With stock prices trading at multi-decade lows against earnings and even book values, deep value has clearly emerged in the markets. For the patient investor with discipline and a long-term horizon, this is the time to capitalise on some very solid wealth-building opportunities."

"If you buy a stock at 40% discount from its intrinsic value – with 10% growth per annum, you will be looking at compounded returns of 22% over five years, so this (value investment) is not a conservative strategy," he added.

DWS Asia Select is available to investors in Singapore through leading distributors including: Aviva Direct, CIMB, dollarDEX, Financial Alliance, finatiQ, Fin-exis Advisory, First Principal Financial, Fundsupermart.com, HSBC, iFast Financial, MAA Financial Planners, Navigator, Phillip Capital and RBS. An initial investment starts from S$1,000 or US$1,000.

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