FUND REVIEW All data as 31 March 2013 unless otherwise stated EASTSPRING INVESTMENTS UNIT TRUSTS DRAGON PEACOCK FUND FUND UPDATE Investment Objective Eastspring Investments Unit Trusts - Dragon Peacock Fund (the Fund ) is to maximise long-term total return by investing primarily in equity and equity-related instruments of corporations, which are incorporated in, or listed in, or operating principally from, or carrying on significant business in, or derive substantial revenue from, or whose subsidiaries, related or associated corporations derive substantial revenue from, the People s Republic of China (PRC) and the Republic of India (India). COMMENTARY Fundperformance and market overview The stock markets of China and India finished mixed in March. China lost ground while India edged higher. China s MSCI Index declined 4.4% in Singapore dollar terms 1 as investors worried about slowing economic growth and rising inflation. February industrial production grew 9.9% from a year earlier, lower than consensus estimates. February s consumer price index rose 3.2% from a year earlier, higher than consensus estimates. A central bank governor, Zhou Xiaochuan, said he is monitoring inflation closely. Beijing cracked down again on rising property prices and moved to regulate the banking sector s wealth management products. In India, domestic politics and a lukewarm interest rate cut held that country s MSCI Index to a 0.4% rise 1. The central bank hinted that scope was limited for a further easing of monetary policy even as it cut the benchmark repo rate 25 basis points, to 7.50%. In addition, the withdrawal of Dravida Munnetra Kazhagam, a political party, from the ruling United Progressive Alliance (UPA) coalition raised concern that Prime Minister Manmohan Singh will have difficulty pursuing economic reforms favorable to business. Against this backdrop the Fund declined 2.9% compared with its benchmark s 2% fall underperformance was 0.9%. In China, stock selection in information technology and financials helped the Fund s performance. The consumer discretionary and materials sectors hurt the Fund. In India, health care and telecommunication services helped Fund performance. Information technology and consumer staples hurt the Fund. Positive contributors Ranbaxy Laboratories Ltd., Mahindra & Mahindra Financial Services Ltd. and China Resources Power Holdings Co. Ltd. were among the larger contributors to the Fund s relative March performance. Each was an overweight position that outperformed the benchmark. Ranbaxy Labs is one of India s largest pharmaceutical makers and is active also in the US market for generic drugs. The stock price recovered in March following declines in January and February, when investors had panicked after Ranbaxy recalled US inventories of its generic Lipitor, a popular anti-cholesterol drug. The fund managers see the January-February sell-down of the stock as overdone. Fresh supplies of Ranbaxy s Lipitor are being delivered to the United States and the company is moving to produce other drugs for the US market. 1
Total return, SGD (%) Mahindra & Mahindra Financial (M&MF) is one of India s largest non-bank auto finance companies, and specializes in commercial vehicles, utility vehicles and cars in the country s smaller cities and rural areas. Much of the company s business involves financing vehicles that are manufactured by corporate parent Mahindra & Mahindra Ltd. The fund managers believe that rural India is a promising demand-growth story, and that M&MF is a solid business. China Resources Power is an independent power producer that supplies electricity along China s eastern and southern coasts. The company, a unit of the China Resources Group, a powerful state-owned conglomerate, reported 2012 results that exceeded market expectations notably. Negative contributors Xingda International Holdings Ltd., Huabao International Holdings Ltd. and China Shanshui Cement Group Ltd. were among the larger detractors from the Fund s relative March performance. Each was an overweight position that underperformed the Fund s benchmark. The fund managers continue to like the stocks. Xingda International, from China, makes steel cord for tires. The stock price declined as consensus earnings forecasts for the company fell. Xingda in late March reported that earnings for full-year 2012 dropped notably. Observers blamed China s economic growth slowdown. The fund managers expect China s growth to recover, benefiting Xingda. Shares in Huabao International lost ground after rising in January-February. Huabao is one of China s largest makers of tobacco flavoring. The fund managers like the company s strong balance sheet, valuation and stock buybacks. China Shanshui Cement is the largest cement producer in Shandong Province, on China s east coast. The company in March reported full-year 2012 earnings that were below consensus estimates, and blamed a fall in average selling prices. Gearing rose notably, but so did the dividend payout ratio. 25 20 15 10 5 0-5 -10-15 -20 FUND PERFORMANCE 1 month 3 months 1 year 3 years* 5 years* Since Inception* 12.4 8.0 8.7 3.6-1.0-2.9-2.0-1.9-3.0-2.0-1.3-5.2-6.0-4.9-7.7-6.6-8.2-9.9 Fund (Offer-to-bid) Fund (Bid-to-bid) 50% MSCI China Index and 50% MSCI India Index Benchmark: 50% MSCI China Index and 50% MSCI India Index. Source: Eastspring Investments (Singapore) Limited. S$; net income reinvested; Offer-bid includes 5% Initial Sales Charge. Inception Date: 18 June 2004 *Annualised. Past performance is not necessarily indicative of the future or likely performance of the Fund. 2
Changes to the portfolio Among its larger transactions, the Fund trimmed positions in Nine Dragons Paper Holdings Ltd. and Colgate Palmolive (India) Ltd., using the proceeds to help raise existing stakes in ICICI Bank Ltd. and Ranbaxy Laboratories. ICICI Bank is one of India s larger private-sector banks and owns the largest Indian life insurer that is not controlled by the government. Ranbaxy Labs is discussed earlier in this report. Colgate Palmolive (India) specializes in oral care products such as toothpaste, and was one of the better-performing consumer stocks in 2012. This reduced the attractiveness of its valuation. Nine Dragons Paper is China s largest paper producer and the biggest maker of packaging paperboard in Asia ex-japan. The stock was trimmed after a sharp August 2012-to-February 2013 gain cut the attractiveness of its valuation. Strategy and outlook The fund managers believe the long-term growth potential of China and India remains strong. Domestic consumption in each country is likely to rise as middle income populations expand. China s stock market valuation remains below historical averages despite having bounced off recent lows, and is attractive in a regional context. This provides a margin of safety to investors and suggests that many risks have been priced in already. The fund managers expect China s economic growth to moderate in the mid-term but to remain strong compared with the world average. Investors look forward to China s new leadership addressing structural issues and rebalancing the economy from an investment-and-export-led model to one that is driven more by consumption. This is expected to be a gradual, multi-faceted and multi-year process. The fund managers are upbeat about the long-term outlook for India, given the country s strong domestic consumption and young working population. Equities valuations look attractive on a regional, long-term perspective. The fund managers believe stock prices probably reflect the worst of India s economic slowdown. For the near term, India will be a major beneficiary of improved global liquidity. In the longer term, the stock market is likely to be driven by corporate earnings growth. The government is moving to trim the fiscal deficit and liberalize certain industries. 3
Notes: 1. MSCI closing levels 31 March 2013, Eastspring Investments (Singapore) Limited 4
Contact details Eastspring Investments (Singapore) Limited (UEN: 199407631H) 10 Marina Boulevard, #32-01 Marina Bay Financial Centre Tower 2, Singapore 018983 Tel: 6349 9711 Fax: 6509 5382 www.eastspringinvestments.com.sg Important Information This document is solely for information and may not be published, circulated, reproduced or distributed in whole or part to any other person without the prior written consent of Eastspring Investments (Singapore) Limited (the Manager ) (UEN: 199407631H). This document is not an offer or solicitation of an offer for the purpose of investment units in the Fund and nothing herein should be construed as a recommendation to transact in any investment product. Please note that the securities mentioned above are included for illustration purposes only. It should not be considered a recommendation to purchase or sell any particular security. The securities discussed do not represent the fund's entire portfolio and in the aggregate may represent only a small percentage of the fund's portfolio holdings. The Underlying Funds may use derivative instruments for efficient portfolio management and hedging purposes. A prospectus in relation to the Fund is available and a copy of the prospectus may be obtained from the Manager and its distribution partners. Investors should read the prospectus before deciding whether to subscribe for or purchase units in the Fund. All application for units in the Fund must be made on the manner described in the prospectus. The value of units in the Fund and the income accruing to the units, if any, may fall or rise. Past performance of the Fund/manager is not necessarily indicative of the future performance of the Fund. The prediction, projection or forecast on the economy, securities markets or the economic trends of the markets targeted by the Fund are not necessarily indicative of the future or likely performance of the Fund. An investment in the Fund is subject to investment risks, including the possible loss of the principal amount invested. Investors may wish to seek advice from a financial adviser before making a commitment to invest in units of the Fund Whilst the Manager has taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, the Manager cannot guarantee its accuracy or completeness. Any opinion or estimate contained in this document is subject to change without notice. The Manager is an ultimately wholly-owned subsidiary of Prudential plc of the United Kingdom. The Manager and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America. Investors should note that the net asset value of the Eastspring Investments Unit Trusts - Dragon Peacock Fund is likely to have a higher volatility due to its concentration of investment in two countries. MM510/240413 5