Passive rise in Asia creating distortions for active managers to exploit
To the casual observer, the emerging Asia region has witnessed a powerful return to investor favour over the past three years To 7 November 2017, in US dollars. However, beneath the surface of the broad market’s strong overall return of 33% over this period are some significant performance disparities – most notably across the capitalisation spectrum, according to Jonathan Pines, Asia Ex-Japan Portfolio Manager at Hermes Investment Management. The ten largest stocks in the region have seen an 88% share price spike. Weighted by market capitalization of the top 10 names, with the rise mainly attributable to the strong performance of Tencent (up 220% in US dollars), Samsung Electronics (146%), TSMC (106%) and Alibaba (64%), far exceeding the 16% rise for mid-caps and 11% rise for small caps.
While the sharp rise of some mega-cap stocks, such as Alibaba, is justified by fundamentals – the broader outperformance of this segment of stocks, and even more particularly the underperformance of the mid cap segment, has been powered in part by a substantial net flow of passive investment into the region. While active managers need to sell across the market cap spectrum to meet redemption requests, the passive manager finds that she only needs to buy the larger cap names to efficiently achieve an acceptable degree of index replication. This is particularly the case for those Asian stocks that also form part of broader global indices.