The unsustainable nature of emerging Asia businesses highlights the importance of taking an active management approach and maintaining a high degree of conviction when investing in exchange traded funds (ETFs).
The dominance of state-owned enterprises (SOE) and businesses driven by the macro environment in emerging Asia is typically overlooked by investors, most of whom buy the market rather than taking a closer look at the underlying stocks, PM Capital Emerging Asia Fund portfolio manager Kevin Bertoli said.
Bertoli said this can be seen in the rise of ETFs in the region over the last 10 years.
“However, these investors typically have a low level of confidence in the underlying earning power of the investment, so when sentiment turns they tend not to differentiate between good and bad businesses,” he said.
“This mentality creates the opportunity to invest in the 10 to 15 per cent of the market that represents good value.”
In another potential blow to ETF returns, Bertoli said SOEs often act as leavers for emerging economies governments to grow the economy resulting in irrational investment decisions that can severely affect shareholders.
In China, 43 per cent of its total industrial and business profit comes from SOEs, which have showed significant growth reductions over the past twelve months, he added.
According to PM Capital, the first quarter of 2013 saw SOEs report 5.3 per cent growth compared to 2012’s first quarter growth figure of 7.7 per cent.
“For this reason, we cannot stress the importance of investing from the bottom up, based on fundamentals and in genuine businesses where the valuation displays a meaningful dislocation from its share price,” Bertoli said.
