Small cap stocks in Asia present a real and often untapped opportunity for Australian investors, says Paul Quah, head of research (Asia) at Acorn Capital.
“Many of the obstacles that investors believe stop them from investing in Asia are easy to overcome and, in our view, the opportunities that await them there are definitely worth the effort.
“While investing in Asia is not without risk, we believe it is also getting safer and simpler.
“Despite the concerns some investors have about the transparency and corporate governance in the region, we have generally found the standard is high and improving.
“It might surprise many Australian investors to know that we usually find Asian small company balance sheets to be more than adequate for their growth ambitions, which we think may be a function of the hard lessons learnt during the 1997 Asian Financial Crisis and the Global Financial Crisis in 2008.
“Shrewd investors are already seeking to take advantage of this by increasing their international exposure, and the results have been positive.
“For instance, a study in 2014 showed the superannuation funds ‘that performed best were those that had a higher exposure to international assets, especially shares and property’. But many investors, including trustees of self-managed superannuation funds (SMSFs), are yet to realise the potential benefits of increasing their investment allocation to international equities,” Mr Quah said.
Research suggests that Australian investors hold a 73 per cent share in Australian equities, and Mr Quah says the risks of this bias can be expected to compound as a result of continuing superannuation inflows and the general softening unfolding in the Australian economy.
“Asian small caps have significantly outperformed Australian small caps by at least 7 per cent a year over the past five to 10 years.
“They have also outperformed the broader Australian market by 2.8 per cent a year over the past 10 years.
The Acorn Capital Asia Small Cap Fund’s deep dive approach has seen it better the broader market performance, posting a return of 36.05 per cent for the year to 30 June 2015 (after all fees), an outperformance of 7.12 per cent against the MSCI Asia ex Japan Small Cap Index.
“There is still more upside”, Mr Quah said.
“The fundamental story for Asian small caps is even more enticing. To start with, the opportunity set is large, spanning more than 5,000 companies across the 10 key Asian markets.
“Unlike their larger Asian counterparts, Asian small caps allow company managers to position for new growth opportunities, whether it be locally or internationally, without the constraints of government ownership ties.
“Another benefit is that Asian small cap investment opportunities are generally not as well known.
“An advantage of this anonymity is that the growth of Asian small cap investment opportunities is not already ‘priced in’.
“This is borne out by the lack of professional analyst coverage or institutional shareholdings in these companies – something Australian investors are able to benefit from,” Mr Quah said.
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