Asia Pacific countries excluding Japan comprise 13% of the MSCI All Country World index. Given that they account for over 50% of the world’s population, their share in the MSCI index is only going to rise further. How should investors capture this opportunity?
"The Emperor’s palace was deemed to be worth more than California"
I lived and worked in Asia for the best part of 25 years and saw huge change during that time. Arriving as a trainee fund manager in Tokyo in early 1989, I witnessed the peak of Japan’s financial bubble and the craziness that went with it. Share price valuations averaged 60x earnings, and property prices were similarly absurd.
The Emperor’s palace in central Tokyo was deemed to be worth more than the whole of California; and New Zealand was rumoured to have fixed its budget deficit by selling half its Tokyo embassy’s tennis court.
Then began the start of the first of Japan’s lost decades, though I have always taken issue with the term. Despite the weak economic growth and declining share prices that ensued, Japanese companies did not shed labour, choosing instead to prioritise employees’ welfare above profitability.
For the young ladies, for example, who continued to be employed by department stores to welcome customers into elevators, a job that undoubtedly would be considered superfluous in a western context, the decades were far from ‘lost’.
Japan’s stock market decline in the ’90s and ‘noughties’ coincided with the emergence of other countries in the Asia Pacific region, first the SE Asian ‘tiger’ economies such as Thailand and Malaysia, then north Asian powerhouses such as South Korea and China.
Indeed, it is Asia’s high economic growth over the last 30 years that has set the region apart from the Americas, Africa and Europe.
However, higher economic growth has not necessarily translated into superior stock market performance. China’s various stock market indices have lagged those in India over the last 20 or so years, despite better economic performance.
They have even lagged those in the US, a country that along with developed countries in general has exhibited low economic growth in recent decades. There has been considerable ‘leakage’ in China, with strong top line growth not reaching shareholders, at least not minority ones.
This may well change as China achieves its imperatives relating to repair of damage done by communism, improving rural incomes for example, but it does highlight an important point about investment in Asia. A top down approach, either a passive one or one that favours countries with high economic growth, can be suboptimal.
Certainly, volatility adjusted returns for broad regional indices over the last couple of decades have been no better than those of the US, say.
If a top down approach is suboptimal, what sort of bottom up approach should you look for in a fund manager? There are thousands of companies listed across Asia and countless ways of selecting them. Furthermore, actively managed funds on average underperform their benchmark; in that regard Asian funds are no different to their counterparts elsewhere. How can you pick a winning fund?
Given the limited amount of information on a typical fund fact sheet, there are I think a couple of simple criteria you should focus on. In a region with so many countries and so many listed companies there is a temptation to invest in all countries and as a result to hold too many stocks. The better fund managers in my opinion are the ones who take no notice of indices, whether country weights, sector weights, or constituents. Such managers are more likely to be found at boutiques, where short term underperformance tends to be far less of a concern.
Poor short-term performance after all should not be considered a risk to be avoided but simply the cost of good long-term performance.
Published in What Investment
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.