Asian institutions go beyond market-cap benchmarks

A Fidelity and Greenwich Associates’ survey of Asian and European institutional funds reveals a huge discrepancy in how they use benchmarks to gain access to Asian assets.

Asian institutional investors are increasingly ignoring traditional market-capitalisation weighted indices to capture the Asian growth story through equities, according to research conducted jointly by Fidelity International and Greenwich Associates.

The study finds that Asian investors and European investors both want greater exposure to the Asia region, but that Europeans continue to stick to market-cap indices to gain that exposure while Asians are focusing more on economic growth rates to determine their allocations.

The survey was conducted earlier this year and elicited responses from 25 European institutions and 20 Asian ones, including sovereign wealth funds, government and corporate pension funds, endowments and insurance companies. Together these organisations manage around $1.6 trillion of assets.

Carlo Venes, head of institutional business for Asia at Fidelity, ascribes this to a desire among many Asia-based organisations to build “a portfolio that reflects the changes in economic landscape they see unfolding around them and the world as it will exist in the future”.

Most Asian institutions holding equities rely on traditional benchmarks to measure their performance. But MSCI and other major global equity indices are measured by market cap, which due to issues around free floats, government or family ownership and capital controls, leave emerging markets accounting for a mere 13% of the MSCI Global Equity Index; the ratio is similar in other benchmarks.

But it is emerging markets where Asian investors see economic growth. There is also an element of ‘home bias’, because these markets are either close to home or exhibit recognisable characteristics.

Currency valuations and the tendency of indices to overweight exposure to the biggest stocks and sectors – particularly those which might be overpriced due to bubble behaviour – are other factors that make traditional benchmarks problematic.

Fidelity and Greenwich find Asian investors are compensating by making supplemental allocations to single countries. For example, 40% of Asian institutions maintain China-specific exposures, 30% do the same for Korea, and 25% for India.

By comparison, only 12% of European institutions say they have a China-focused allocation, 4% have one for India, and none for Korea. And while most Asian institutions say they will increase this sort of activity, few in Europe plan to do so.

Of course, one reason why most emerging markets are not well represented in global benchmarks is liquidity. Ironically, Asian institutions say they do not make Europe-specific allocations, despite its economic size and market depth. This could reflect a lack of familiarity, because 60% of Asian investors say they do maintain dedicated exposures to the United States.

The natural response from the indexing community to Asian wariness of cap-weighted indices is to propose using fundamental or otherwise customised products, designed to capture growth or other factors. However, the survey reveals few Asian investors are choosing this route, because these indices create their own sector biases.

Asian investors have not solved the problem, however, by simply allocating more to single markets. Many emerging markets’ equities universes are skewed to a handful of sectors – think tech in Taiwan, for example.

Abhi Shroff, consultant at Greenwich, notes that two-third of China’s A-share market comprises of just three sectors: finance, industrials and energy; those three make up 90% of the H-share market. But consumer staples and healthcare are only 9% of the A-share universe.

Fidelity portfolio manager Sudipto Banerji says the only way around this is to look more to global sectors and not worry about where a company happens to be listed. Global multinationals often capture emerging-market growth stories better than locally listed companies, he argues.

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