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Asian equity indices are increasingly concentrated in a small number of mega-cap technology companies. Taiwan Semiconductor Manufacturing Co. (TSMC), Samsung Electronics and SK Hynix now account for nearly a third of the MSCI AC Asia Pacific ex-Japan Index by weight, according to Rathbones. Korea and Taiwan combined represents close to half of the index. Research* commissioned by one of the UK’s leading wealth and asset management firms suggests this concentration is prompting professional retail fund selectors to place greater emphasis on active strategies when investing in the region.
Some 98% of IFAs, discretionary fund managers (DFMs) and private banker fund selectors surveyed agree that active Asian equity funds increasingly offer more attractive potential long-term, risk-adjusted returns than passive alternatives, including 20% who strongly agree. Against this backdrop, more than three quarters (77%) believe allocations to high-conviction active funds are likely to increase over the next three years, with 12% expecting allocations to increase dramatically.
Lisa Lim, Head of Asia ex-Japan Equities, Rathbones Asset Management said: “Major Asian equity indices are driven by price momentum and has no considerations of the long-term company fundamentals or valuation. At current levels of concentration, there is a lot of inherent and unnoticed risk in the index. For long-term investors, passive investing may not provide a full reflection of the long-term and diversified economic potential of the Asian region.
“This is why active management remains highly relevant for IFAs, DFMs and private bank fund allocators seeking exposure to Asia. We expect demand for high-conviction active funds in the region to grow as investors look beyond index concentration and seek access to innovative, high-quality businesses.”
The region is at a multi-year growth inflection point, with long-term economic demographic and technological trends reshaping market drivers. In Asian equities, this represents a structural shift from low-cost manufacturing towards global leadership in high-tech innovation and domestic consumption-led growth, marking a change from the previous decade’s market dynamics.
Lim added: “Asia is the world’s fastest-growing region and a central engine for long-term growth. We see attractive investment opportunities across a range of sectors Many companies in Asia are already global leaders in their respective areas such as technology including AI, automation, infrastructure and increasingly in healthcare and consumer products.
“While recent market rallies in the region have been concentrated in specific technology sectors in South Korea, China and Taiwan, many underappreciated areas across Asia continue to trade at a very attractive valuations especially when compared to their global peers. This creates increasingly attractive opportunities for active stock pickers who are willing to look beyond the index.”
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