Asian equity markets have outperformed Anglo-Saxon and western European markets over the past two years and 2005 is predicted to be no different.
According to a new report by Greenwich Associates, one third of portfolio managers at Asian institutions expect overall long-term rates of return of 11-20 per cent.
It is hardly surprising, therefore, that institutional investors are being urged to add more Asian equities to their emerging markets portfolios.
FT Mandate’s research team examined 20 of the biggest managers of Asia (ex Japan) equities, ranked them by assets under management and solicited submissions for a fictitious Request for Proposal by a continental European country’s ?15bn fund to meet future liabilities of pensioners.
The supposed fund is tendering several Asia (ex Japan) equities mandates, so we wanted to compare investment processes, portfolio breakdowns, investment teams and performance.
Six submissions were received before the deadline from Aberdeen Asset Management, Goldman Sachs Asset Management (GSAM), HSBC Asset Management, JPMorgan Fleming Asset Management, Schroders and State Street Global Advisors (SsgA).
All six asset managers use fundamental, bottom-up research to identify and exploit mis-priced stocks, while HSBC and SSgA employ quantitative screens to supplement the process.
Respondents are upbeat about prospects for corporate earnings growth in the Asia-Pacific region this year. They expect Asia (ex Japan) equities to outperform developed equity markets.
Schroders says growing transparency, better corporate governance and a focus on enhancing shareholder returns is resulting in more companies declaring larger dividends and share buybacks.
Investment opportunities in Asia are being boosted further by increasing issuance of real estate investment trusts (Reits) due to a drive to take non-business related assets off balance sheets and increasing equity issuance in China.
JPMorgan Fleming says that while interest rates will remain favourable for asset reflation, rising costs will eat into manufacturers’ margins. The best stocks to own will be domestic consumption goods across the region.
Declining us influence
SSgA points out that although Asia markets retain linkages to the US economy, currency and interest rates, capital markets in the region are expected to broaden and deepen with the secular growth in India and China coupled with growing domestic economies in surrounding markets.
SSgA also expects that, in an environment of low interest rates and improving dividend yield in the Asian equities market, local institutional investors will take more interest in domestic equities. It is hoped that the introduction of more long-term investors will decrease market volatility.
GSAM points to the possibility that investment spending, which has been stagnant since the Asian crisis, might make a comeback. Capacity utilisation levels are said to be close to historic highs and this, coupled with low interest rates could lead to a revival in capital expenditure.
Asian interest rates are forecast to remain benign and to present no threat to the ongoing domestic recovery in the region.
GSAM thinks Indonesia is a good investment bet, because several sectors such as the mobile telecom and the banking sectors are experiencing strong secular growth.
The firm is underweight Malaysia due to expensive valuations. Sectorially across the region, Goldman Sachs is overweight banks and consumer discretionary goods and
underweight materials, transport and industrials.
Aberdeen Asset Management says that pension fund managers are considering Asian equities as “a crucial component” of client portfolios for the future. The firm warns that returns from developed markets are unlikely to be enough to fund an institutional investor’s savings objectives and so many emerging market managers have increased their exposure to Asia. Aberdeen expects this trend to continue.
Of the funds for which Standard & Poor’s can provide performance data, the Aberdeen Far East Emerging Economies Unit Trust was the runaway winner over three and five years, beating both the MSCI All Countries Asia ex Japan index and the FTSE World Pacific ex Japan index by a handsome margin. The JPMorgan Fleming Institutional Asia Equity Fund was the best returning flagship fund over one year.
The HSBC GIF Asia ex Japan Equity Fund was the worst performer over five years.
While Aberdeen’s fund was up a sensational 66 per cent, HSBC’s returns nose-dived to -15.94 per cent.
Aberdeen Asset Management
Goldman Sachs Asset Management (GSAM)
HSBC Asset Management
JPMorgan Fleming Asset Management
Schroders and State Street Global Advisors (SsgA)
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