Lincoln Far East Trust benefits from defensive qualities in volatile markets

The Lincoln Far East Trust’svalue approach is enabling it to identify good quality companies to invest in during market volatility with the fund overweight in Hong Kong, Singapore, Taiwan and Malaysia.
However it is remaining out of India despite recent falls in the market as the fund managers believe it is difficult to see value.

The Far East Trust outperformed its benchmark, MSCI AC Asia-Pacific ex-Japan index, in the fourth quarter of 2007 as market volatility in the wake of fears of a US recession and the onset of credit crunch hit. It added 2.4 per cent compared with 1.7 per cent for the benchmark.

The managers feel positive about the positioning of the fund in 2008 despite current market conditions and the probability of further volatility. Mondrian Investment Partners, who manage the fund for Lincoln, focus on a risk-adjusted-returns approach and use a dividend based methodology to identify attractive markets.

Hong Kong, which offers access to the Chinese market without attracting the high valuations of Chinese companies, is seen as particularly attractive. The fund has bought into Bank of China Hong Kong, the largest mortgage lender in Hong Kong, which is likely to benefit from falling interest rates and significant growth in demand for mortgages both in Hong Kong and China. Increased credit card lending is another factor supporting the purchase.

Taiwan similarly also offers exposure to the Chinese market without being over-valued and also benefits from strong fundamentals. The fund increased its position in Taiwan SemiConductors during the fourth quarter of 2007 and analysts have recently visited up to 25 companies in Taiwan on a research visit.

The fund remains overweight in Singapore, Malaysia and Thailand compared to its benchmark while it remains underweight in Australia, China and India. The major recent disposal by the fund was the sale of a stake in China Telecom which had performed strongly and offered the chance to take profits.

While the fund remains underweight in the financials sector against its benchmark it has added to positions in a number of financial companies during the fourth quarter. They included Insurance Australia Group and Korea’s Kookmin Bank. However, the stake in Korea’s Hana Financial was reduced.

Analysts believe there are still signs of growing consumerism in Asian markets with strong demand from domestic consumers. Ownership of mobile phones, for instance, is continuing to grow rapidly. As a consequence the Far East Trust is overweight against its benchmark in consumer discretionary and consumer staples plus telecommunication services.

Strong-performing stocks include companies such as Malaysian firm Sime Darby, which is one of the largest palm oil producers in the region. It is benefiting from pricing pressures. The Far East Trust has no investment in the Indian market and managers argue it remains too expensive although there are a couple of opportunities that are being looked at.

Fiona Barwick, Director of Regional Researchat Mondrian, said: “We are feeling positive about the fund. The defensive characteristics have come through and we focus on identifying the right fundamentals and good value companies no matter where they are. Markets in the region are still relatively dependent on global growth from the consumer; we are probably in for more volatility going forward.”

Will Hale, Head of Distribution at Lincoln Financial Group commented “The Lincoln Far East Trust has outperformed its peers over the last six months since markets became more volatile.† The past couple of months have served to emphasise the defensive qualities of the fund and reinforce the importance of Mondrian's consistent and highly disciplined investment process. Despite recent volatility, we believe the Asian growth story remains intact and that our fund is well positioned to deliver strong performance in both absolute and relative terms.”