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Morgan Stanley's top-performing fund bets on Asia's undervalued stocks

The Asia Opportunity Fund, which focuses on equities in the region excluding Japan, returned 44% in the past year, beating 99% of its peers


A TOP-PERFORMING Morgan Stanley fund is betting on cash-rich consumption-focused stocks in Asia, especially China, to manage risks in market cycles this year.

The Wall Street firm's Asia Opportunity Fund, which focuses on equities in the region excluding Japan, returned 44 per cent in the past year, beating 99 per cent of its peers, according to data compiled by Bloomberg. The portfolio focuses on undervalued companies with low debt or net cash on their balance sheets, many of which are found in consumer sectors, said Kristian Heugh, who has been co-managing the fund since its inception in 2016.

"We seek to protect investors' capital by focusing on high quality companies with sustainable competitive advantages and purchasing them at a discount to our estimate of intrinsic value," he said. "We remain vigilant in selling names approaching our estimate of their intrinsic value and redeploying that capital in what we believe are the next big ideas."

China is the US$1.5 billion fund's largest-weighted country, accounting for 57.7 per cent of assets as of end-December. He said the world's second-largest economy will remain a key focus this year despite its slower growth in 2019.

Asian consumer stocks provide "high returns on capital, low leverage and quality growth prospects", Hong Kong-based Mr Heugh said. The region offers "the highest ratio" of high-quality companies that have generated both 15 per cent return on invested capital and 15 per cent revenue growth over the past three years, he added. The MSCI Asia ex Japan Index has gained 3.4 per cent so far this year.

With more than 800 million people emerging from poverty since market reforms began in 1978, China is an especially attractive hunting ground for consumption names, he said. Key themes he is looking at include better-quality food and drink as well as access to Internet services, health care and better education opportunities for children.

As a result, the Asia Opportunity Fund's largest positions in China focus on the education, food, beverages, restaurants and travel sectors. Food-delivery giant Meituan Dianping, distiller Kweichow Moutai and soy sauce maker Foshan Haitian Flavouring & Food were among the top contributors to the fund's peer-beating performance last year.

The top five performers are trading at an average valuation of more than 50 times earnings estimates for 2020, compared with about 14 times for the MSCI Asia excluding-Japan Index. All have net cash on their balance sheets.

While only about 1 per cent of the portfolio is allocated to South-east Asia due to expensive valuations, its Asean revenue exposure is higher, thanks to investments in key regional Internet stocks Alibaba Group Holding, Tencent Holdings and Naver Corp.

"Alibaba owns South-east Asia's largest e-commerce platform Lazada, Tencent is the largest gaming company in this region, and Naver owns Line, which is popular among South-east Asian mobile Internet users," Mr Heugh said. BLOOMBERG