Industry Voice: An attractive risk-return profile and ample liquidity underscore the compelling case for Asia ex-Japan (AxJ) equities as a core allocation in any global asset portfolio. But the SMID Cap cohort within AxJ is frequently overlooked.
That is very likely due to limited AxJ SMID product choices: passive trackers are virtually impossible to construct, while the economics are not as commercially attractive to active managers. Tokio Marine Asset Management (TMAM) offers a credible UCITS-compliant solution, backed by an institutional quality investment process and team, to address this market need.
Critical Size, Consistent Growth, Inherent Diversity
AxJ equities score very favourably on the three key characteristics important to asset allocators: liquidity, return and risk.
AxJ represents 8-10% of the MSCI World Index. As such, the opportunity set is already critically sized: wide, deep and liquid. Yet, that is a clear under-representation of its 25% share of global GDP, which should increase over time as a greater proportion of the underlying economy gains access to equity markets.
Chart 1 AxJ Region Representation: Share of Global GDP vs Weight in MSCI World Index
Source: MSCI, World Bank, compiled by TMAM; *As at August 31, 2018
Despite outgrowing every other region in the world over the past decades, AxJ's future growth prospects continue to be robust. In fact, an increasingly large proportion of that growth is being driven by domestic consumption and infrastructure build-out.
Finally, a high level of diversity across all 11 GICS sectors and a mix of emerging and developed economies help dampen the volatility within the AxJ equities universe.
Compelling Proposition with a Scarcity Factor
The SMID universe within AxJ equities is substantial, with the MSCI AxJ SMID Index spread across nearly 2,000 securities. Compared to the larger-cap MSCI Standard indexes for AxJ or EM, the SMID cohort has a significantly higher exposure to consumer-oriented sectors, and therefore to the structural domestic spending theme. The broker coverage on AxJ SMID companies is significantly lower which contributes to greater pricing inefficiency as well as greater idiosyncratic risk for their stocks. This is manifested in the lower correlations of the MSCI AxJ SMID Index with the MSCI World Index or S&P 500 than its larger-cap counterpart, underscoring its merit as a diversifier.
A passive portfolio to effectively track the MSCI AxJ SMID Index is virtually impossible to construct, given the considerable breadth of its constituents. For instance, the cumulative weight of top-10 members of the MSCI AxJ SMID Index is less than 7%, and only the first 30 constituents have individual weights in excess of 30bps each. Furthermore, while smaller companies are naturally riskier, most are not closely followed by the sell-side. Thus, in the absence of proprietary due-diligence and research, a passive portfolio, even if theoretically possible, may end up owning lower quality constituents.
Chart 2 Concentration Profile: Weights of MSCI AxJ, AxJ SMID Index Constituents
Source: MSCI, World Bank, compiled by TMAM; *As at August 31, 2018
On the other hand, the relative scarcity of actively-managed AxJ SMID funds can be attributed to the inherently lower commercial attractiveness. Once again, the paucity of sell-side coverage and higher risk imply greater resource intensity for the manager, even as the lower liquidity of individual stocks limits the maximum AUM capacity for a SMID product to no more than USD1bn. Moreover, given the attractiveness, well-managed funds tend to fill up that capacity rather quickly.
A New Investment Avenue
TMAM has recently launched a UCITS-compliant AxJ SMID Cap fund. The fund is managed by a seasoned, seven-member investment team based in Asia. The team is organized in a unique sector-country matrix to ensure that in-depth bottom-up research is complemented by a top-down overlay. The investment approach is style-agnostic to optimise the impact of stock selection, with ESG considerations integrated into our proprietary valuation framework. In addition to the AxJ SMID product, TMAM offers a complete range of investment vehicles to access AxJ equities.
Tokio Marine Asset Management (TMAM)
TMAM is a Japan/Asia equity specialist with over 30 years' market experience and approx. $60 bn AUM as at September-end 2018.
For more information about uncovering investment opportunities in Asia ex Japan Equities, please contact Business Development, Tokio Marine Asset Management (London) Limited, authorised and regulated by the Financial Conduct Authority (FRN 487699).
Email: [email protected]
Website: www.tokiomarineam.co.uk
Disclaimer
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