With a backdrop of volatility and uncertainty, Asia continues to be one of the few reliable sources of growth today. Investors can capture good profits by investing in Asia’s smaller companies. However, focusing on company growth is not enough for equity investors in this space to make the best returns.
There is a huge number of opportunities for companies to take advantage of Asia’s structural economic growth story, and many investors may capture this exciting return opportunity by investing in Asia’s smaller companies. However, simply focusing on company growth is not enough for equity investors in this space to make the best returns.
Asian smaller companies’ shares have historically delivered great returns over time. They have outperformed their larger siblings, and have done this with similar overall volatility or risk. The misconception that small equals risk can be suppressed when we compare the volatility of the respective MSCI benchmarks, which track very closely.
The diverse market means there are as many risks as there are opportunities. A research-intensive approach is essential to ensure that bad apples are avoided. The best apples are picked. There is no easy way to approach this puzzle. It does entail a large dose of sweat and tears.
Despite many intuitively believing a focus on growth is the best approach to investing in Asian smaller companies, history indicates that taking a Value approach to investing in this market significantly outperforms over time. Investors who are focused on quality and growth end to over-pay for these stocks and give up future equity returns. The most important driver of equity returns over time is the price you pay and to avoid overpaying.
A true Value approach can take you away from popular household names and towards those stocks that are ignored and under-appreciated by the market. This is vital to take advantage of mispricing, as we want to exploit behavioral biases of other investors who tend to overpay for growth and underappreciate Value stocks.
To follow this approach requires discipline. It’s better to spend a huge amount of time understanding the companies, the drivers of their earnings, the risks and the rewards and look for a large margin of safety before looking to invest. It’s important to focus on companies that have moats and franchise values that are under-appreciated or those with differentiated propositions of a next-generation business
It’s better to have a well-diversified portfolio. Portfolio construction is a distinct activity that is built around capturing the best ideas while also looking to diversify risk. As an investor, it’s essential to build a high conviction portfolio of best approaches – benefitting from natural diversification of the portfolio due to high idiosyncratic risk while look for maximum upside potential. Most of the investment opportunities find across Asia currently lies in countries such as China, Hong Kong, Korea, India, and Taiwan.