New research from Rathbones Asset Management suggests growing numbers of fund selectors are favouring active Asian equity strategies. With index concentration increasing across the region, we look at some of the factors shaping asset allocation decisions and the implications for portfolio construction.
Asian equity markets have long offered investors access to some of the world’s fastest-growing economies. However, increasing concentration within regional indices is prompting many fund selectors to reassess how they gain exposure to the asset class.
Research commissioned by Rathbones Asset Management found that 98% of professional fund selectors believe active Asian equity funds increasingly offer more attractive long-term, risk-adjusted return potential than passive alternatives.
More than three-quarters (77%) expect allocations to high-conviction active Asian equity funds to increase over the next three years, with 12% anticipating a dramatic rise.
The findings come against a backdrop of growing concentration within Asian equity benchmarks. Rathbones highlights that Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics and SK Hynix now account for nearly a third of the MSCI AC Asia Pacific ex-Japan Index, while South Korea and Taiwan collectively represent close to half of the benchmark.
Lisa Lim, head of Asia ex-Japan equities at Rathbones Asset Management says that: “at current levels of concentration, there is a lot of inherent and unnoticed risk in the index”.
The trend reflects a broader pattern seen across global equity markets, where a relatively small number of large technology companies have driven a significant proportion of returns.
While passive funds continue to provide efficient and cost-effective market access, increasing concentration means investors are becoming more exposed to a narrow group of companies, sectors and markets.
For investment committees, the question is whether market-cap-weighted indices still provide sufficient access to the wider opportunities available across the region.
Asia’s investment story is also continuing to evolve. Alongside established technology leaders, the region is benefiting from structural growth themes including artificial intelligence, automation, healthcare innovation and rising domestic consumption.
Many of these opportunities sit outside the largest benchmark constituents and may receive little representation within passive strategies.
This is one reason active managers believe their approach remains relevant. Rather than allocating capital based solely on market size, active portfolios can focus on business fundamentals, governance standards, balance-sheet strength and long-term growth prospects.
Lim says that the opportunity set extends well beyond the stocks that have dominated recent performance.
While market rallies have been concentrated in certain technology sectors across South Korea, China and Taiwan, she says that “many underappreciated areas across Asia continue to trade at very attractive valuations”, particularly when compared with global peers.
That is not to say passive investing has lost its place within portfolios. Cost efficiency and transparency remain compelling advantages.
Yet as concentration becomes a defining feature of many equity markets, investment committees may need to consider whether a blend of active and passive exposure offers the most effective way to access Asia’s long-term growth potential.
The debate is increasingly moving beyond active versus passive. Instead, it is becoming a question of how best to balance both approaches in markets where benchmark concentration is reshaping the investment landscape.
Main image: Asia, map, chuttersnap-aku7Zlj_x_o-unsplash
