Ian Cowie: I’d like to invest in Asia, but without China

Our columnist is hoping that in time there will be an Asia-ex China investment trust sector to cater to investors like himself who do not want exposure to the world’s second-largest economy.

Rising tensions around Taiwan and the Great Fall of China stock markets is reminding more folk about the financial risks of investing in the world’s biggest dictatorship. But it isn’t easy to get exposure to the entrepreneurial dynamism of Asia without also inadvertently investing in the regime that imprisons more than a million Uyghurs in the forced labour camps of Xinjiang.

• Research: Top Investment Trusts |Sustainable Funds List | Top UK Shares

Regular readers will know that these conundrums are close to my wallet because I began investing in China more than 20 years ago, after business trips to Hong Kong, Shanghai and Shenzhen back in the 1990s.

Then, when I learned about the maltreatment of China’s Muslim minority, I sold all my shares in Fidelity China Special Situations (LSE:FCSS) at 227p in April 2020.

Since then, FCSS has held up fairly well, with the shares trading around 221p this week. That’s a good result relative to the Association of Investment Companies (AIC) ‘China and Greater China’ sector average where share prices have shrunk by 18% in the last year and 11% over the last five years, with 10-year returns remaining positive at 124%.

By contrast, the AIC ‘Asia Pacific’ sector is 1% down over the last year, 22% up over five years and 128% ahead over the last decade. At first glance, that might look like an argument for a more diversified approach to any geographical zone. But problems emerge when we look at the underlying asset allocation of individual investment trusts.

For example, Pacific Assets (LSE:PAC) is the top performer in its sector over one and five-year periods with total returns of 21% and 43%, following 177% over the last decade. But, even if a meagre dividend yield of 0.6% - which has shrunk by an annual average of 2.4% over the last five years - was acceptable, PAC’s near 9% exposure to China might be less so.

• Ian Cowie: no regrets about selling my China investment trusts
• Ian Cowie: will history repeat itself and lead to US/China cold war?
• Ian Cowie: China is cheap, but I prefer India and Vietnam

Similarly, Schroder Asian Total Return (LSE:ATR) ranks second in this sector over the last year with a gain of 6%, after 24% over five years and 164% over the decade. Better still, ATR yields 2.6% after raising shareholders’ income by a remarkable annual average of 18% over five years. Unfortunately, more than 13% of its assets are invested in Hong Kong, where civil rights are rapidly receding into folk memory and no fewer than 160,000 people left last year to take up residency in the United Kingdom.

Meanwhile, Pacific Horizon (LSE:PHI) is the ‘Asia Pacific’ sector top performer over the last decade, with a total return of 276%, followed by 41% over five years and 18% shrinkage - or, in plain English, losses - over the last year. Worse still, for those of us who care about such things, no less than 34% of PHI’s money is in China.

Which reminds me that when I reported bailing out of Chinese markets, several critics attacked me on anti-social media, with some proudly declaring they didn’t give a fig about the Uyghurs. One wrote to tell me how badly America and Britain had behaved in bygone centuries, as if that might be some comfort to the victims of tyranny today. It seems that even the bloody war in Ukraine has failed to wake up some investors to important differences between democracy and dictatorship.

More positively, I am glad that I used most of the cash raised by getting out of China to increase investments elsewhere in Asia. For example, I had originally invested in Vietnam Enterprise (LSE:VEIL) at 404p in July 2018, before taking profits at 760p in February 2022, and selling out completely at 541p in October last year.

As discussed at those times, Vietnam is no nirvana for Western liberals either, but at least it does not lock up a million of its people in labour camps. It is difficult to be an ethical investor in emerging markets, because relatively few countries enjoy all the civil liberties many Europeans take for granted, but I remain a shareholder in VinaCapital Vietnam Opp (LSE:VOF), where I paid 426p last October for shares that cost 458p this week.

• The investment trust boards with and without skin in the game
• From Nick Train to property, the out-of-form funds pros are buying
• The 12 investment trusts with all-male boards

Better still, while VEIL pays no income at all, VOF yields 2.9% after raising shareholders’ income by an annual average of 12% over the past five years. If that rate of ascent is sustained, which is not guaranteed, it would double distributions in just six years.

Here and now, I believe there might be a case for the AIC to launch an ‘Asia ex-China’ sector in much the same way that ‘Asia ex-Japan’ was introduced by a rival organisation more than 30 years ago.

Annabel Brodie-Smith, a director of the AIC, told me: “We review our investment company sectors regularly to ensure they are as clear and relevant as possible.

“Our objective is to help investors find and compare companies with similar characteristics easily and tocompare investment companies with open-ended funds.

“Currently, we do not have any member companies with a mandate to invest in Asia excluding China. However, if this was to change and there were a number of investment companies with this mandate, we would consider creating a new sector.”

That is eminently reasonable. It may well be that I am in a minority of one, wishing to invest in Asia and to avoid China. But all that might change quite suddenly with a bit of bad news from Taiwan. Don’t say you weren’t warned.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in VinaCapital Vietnam Opportunity Fund (VOF) as part of a globally diversified portfolio of investment trusts and other shares.