Investors who remain cautious of Asian investment, and view the region as outside mainstream investment consideration, are missing out on valuable opportunities according to Asian fund managers Seres Asset Management and Acorn Capital.
Mr Evan Erlanson, chief investment officer of the Hong Kong based Asian investor Seres Asset Management, says by discounting Asian investment, investors are missing out on growth opportunities that cannot be found elsewhere in the world.
“Asia represents a larger demand pool than all other emerging markets combined, allowing it to support more sustainable growth and innovation over the long term,” Mr Erlanson says.
Mr Douglas Loh, head of equities at Acorn Capital, and manager of the Acorn Capital Asia Small Cap portfolio, agrees that Asian exposure should form a part of every diversified portfolio.
“Asia is characterised by market inefficiencies, a large investment universe and higher economic growth rates driving a rapidly expanding middle class,” Mr Loh says.
The fund managers say that growth prospects in China will increase investment opportunities in the region.
“Until recently, China’s economic growth has been driven by exports. However, the next stage of its development will see a growing consumer class purchase goods and services associated with a higher standard of living,” Mr Loh says.
“A wide array of industries, including food, household goods, education, travel and health care spending for personal wellbeing will benefit from this growth.”
He cites recent research that shows by 2022 more than 75 per cent of China’s urban consumers will earn between RMB 60,000 and 229,000 a year (AUD$10,300 and $40,000). This compares to 4 per cent in 2000.
“In purchasing power parity terms, this range is between the average income of Brazil and Italy. This demand is not only positive for Chinese companies, but for the region as a whole.”
Mr Erlanson says China is in the early stages of financial reform that will eventually result in higher real rates, lower asset prices and the more rational allocation of capital.
“This process is likely to help resolve some of the excesses of the past 14 years and give investors more opportunities to make rewarding long-term investments in Chinese equities,” Mr Erlanson says.
As with any investment, it is important to be aware of the factors that will affect future returns.
Mr Erlanson says those investing in Asia need to avoid companies with a high degree of government control or ownership, or those in a position to perform ‘national service’.
“As a fund manager, we try not to think of Asian markets in their current form. Instead, we anticipate how they are likely to develop structurally over the next decade and choose the companies that we believe are most likely to rise to the top,” Mr Erlanson says.
“Such a strategy will deliver the benefits of Asian growth even if the broad market does not perform well.”
Mr Loh says Asian small cap investors must determine their risk appetite and their investment (time) horizon.
“By their nature, small caps in any country are more volatile than large caps, so your time horizon should be long enough for the investment to pay off; at least five years and preferably more.”
While small cap investments should not make up the largest portion of your portfolio Mr Loh says the Asia ex Japan small cap space is an ideal hunting ground for investment opportunity.
“There are approximately 5000 companies in the universe across 10 countries and 12 industries. A huge proportion of these companies are not on the radar of investors and professional analysts, meaning the opportunity to discover well-managed small companies generating attractive returns for investors is high,” he concludes.
Acorn Capital Ltd is a specialist investment manager investing in small and microcap companies traded on exchanges in Asia (ex Japan) and Australia. It was formed in 1998 and Australian Unity became a joint venture partner in December 1999. It offers investment opportunities in three main areas:
Seres Asset Management is a thematic long-short manager based in Hong Kong that focuses on small and mid-sized companies in Asia (including Japan). It was formed in 2010 as a joint venture partnership with Australian Unity.
For further information, please contact:
Douglas Loh, head of equities, Acorn Capital
P: 03 9639 0522
Evan Erlanson, chief investment officer, Seres Asset Management
P: +852 (3656) 3366