Investing in regional expertise

Schroders, whose Asian operation is backed by a well-resourced research centre in Hong Kong, has concluded there are at least three factors which can determine how investors should access the world’s fastest growing economies: the strength of the investment case warrants an explicit allocation through local stocks, rather than diluted investments through developed companies; investing in globally diversified emerging markets funds for core exposure is preferable in risk/return terms to buying single country funds; and specialist emerging market fund managers should be preferred to international managers attempting to cash in.

The new breed of pan-Asian houses, keen to compete with established Western specialists such as Franklin Templeton, Fidelity and indeed Schroders, is increasing the choices available to distributors, both European and Asian, who have been gradually scaling up their exposures to emerging markets.

Mirae Asset, based in Seoul, is spreading its activities across the Asian region and beyond to Europe and Latin America, in order to diversify earnings and at least partially offset its reliance on a saturated and redemption-prone Korean market.

Unlike the diversified blueprint laid down by Schroders, Mirae’s clients are showing appetite for both pan-Asian vehicles –shifting the focus from the continent’s fast-overheating Chinese engine room – and single country funds, reflecting the Korean group’s home country expertise.

“The focus away from China is not such a bad thing, as there are plenty of other opportunities in Apac,” confirms Martin Gilbey, chief marketing officer at Mirae Asset’s international hub in Hong Kong. “Single country Asian exposure may have been seen as too risky six months ago, when people only wanted regional Asian products, but now European investors increasingly want single country product, while local investors in Asia have long been comfortable with this.”

Mirae’s Korean equity fund already features on the platforms of 12 private banks and family offices in Asia, having grown from $80m (E55m) to $260m since July 2010 through support from just five major Asian distributors. With Korean GDP forecasted to grow at 4 to 4.5 per cent, with less volatility than China and India, Mirae recommends Seoul shares should really account for 12 to 15 per cent of Asian allocations in relation to the MSCI Asia Pacific index. “With Korea, you get developed market risk exposure with emerging market growth,” claims Mr Gilbey.

Along with key competitor Nikko from Japan (see box), Mirae claims only managers from the region can demonstrate expertise on the ground. Mirae has investment staff researching and trading stock in China, India and Brazil. Strategies including Asia-Pacific ex-Japan, global emerging markets and an Asian consumer fund.

Mirae’s funds are beginning to appear in strategic allocations of US and European groups, although Asian-based private banks are more likely to use them as tactical plays for their private clients. “One of the continuous challenges in Asia is that people do have a very short-term viewpoint and the concept of strategic asset allocation and investing for the long-term is not as developed as in other markets,” says Mr Gilbey.

Yet many investors are shunning active managers, in favour of cheap, easily tradable exchange traded funds (ETFs). In response, Mirae has launched its own 13-strong ETF range in Korea, but plans to launch another 6 funds in Hong Kong before September.

Foreign and local groups

“We see a number of problems with large international groups,” says Blair Pickerell, Hong Kong-based CEO of Nikko Asset Management, which recently acquired $7bn (E5bn) in assets, along with 100 staff from Singapore-based DBS, to further boost its cross-regional operation, already Asia’s largest, to a $160bn total.

“Firstly, those groups have a home country bias,” says Mr Pickerell, an American who calls the US “yesterday’s economy”.

A “global head” is likely to have worked only in a New York or London office and the whole operation is typically heavily focused on the North American or UK market. “A lot of their executives who have reached positions of considerable seniority have only been to Asia four or five times, and many have never been there at all and yet they have become a global head,” he says. “But Asia is very different from the other half of the world.”

Also, despite Asia’s booming economies, so-called global groups are cutting back their operations there because they are victim to economic and business problems in their own backyards, leaving them inadequately resourced to manage foreign investments.

Crucial to the Asian investment mentality is the ability to take advantage of opportunities and launch products while they are still current, believes Mr Pickerell. “Not every Western firm is slow and not every Eastern firm is fast, but there is a sense of urgency and time to market that is much faster in Eastern firms. You need to be fleet-footed. There is no time for hanging around. If we see an opportunity, we need to grab it quickly.”