(This piece first appeared in Opalesque in March)
Whisper it, but if GFIA's Peter Douglas thinks there is 'the smell of bullishness is in the air' then things must be improving in the Asian hedge fund world. Douglas comments that after four long lonely years of researching boutiques in Asia and the emerging markets, he sees managers beginning to raise money. He writes: "A tiny Asian small-cap equity manager has just hired a new senior CEO to manage its growth. The longest-standing Thai equity fund, (Quest - reported in Opalesque here), out there has just closed its low-fee fund to investors and is channelling new money into a higher-fee class."
Douglas filtered one week's worth of manager notes sitting in his in-box, screening out those that require an internet connection to read, those that, 'with Solomonic wisdom, don't make market or performance forecasts, or were equivocal' and came up with the following prognostications:
"we are quite optimistic this will be a good year for markets" - middle east specialist
"we view the future quarters with confidence and expect strong returns" - turkey specialist
"expect more price stability" - Japan credit specialist
"maintained slightly long exposure" - Japan market neutral manager
"our market continues attractive relative to US$ and we're well positioned to outperform" - EM credit manager
"clear signs that economies are stabilising, systemic risks receding, and asset correlations falling.. the biggest risk that investors have right now is to underestimate the extent of the positive performance that markets can enjoy" - emerging European equities
"2013: it looks good" - Indian equity manager
"we may see Russian equities excel" - Russian equity manager
"a correction may appear but unlikely to be very deep" - China equity manager
Douglas found only two who sounded 'gloomy, grumpy, or cautious':
"the Fund is only 73% invested" - manager in early 60's with 40 years' investing experience, whose fund has just has a great run
"70% excess cash" - manager owning >50% of own fund
Douglas concludes: "I'll leave you to your own conclusions. My gut feeling is that markets tend to overrun, and that the hunt for yield will soon find credit to be yesterday's story, and hence the bullishness is probably right for now. But the almost-unanimity of sentiment now doesn't feel comfortable."
EDHEC-Risk Institute study reveals the inefficiency of Asian stock market indices
(This piece first appeared in Opalesque in March)
Researchers from the EDHEC-Risk Institute have reported the results of a study entitled "Assessing the Quality of Asian Stock Market Indices," which examined results for 10 major Asian stock market indices over the past decade.
Written by NarasimhanPadmanaban, Masayoshi Mukai, Lin Tang and Vƒ©ronique Le Sourd, the team comments that indexation continues to play an important role in global asset allocation. "Total worldwide assets under internal indexed management rose to $5.994 trillion as of June 30, 2011, a 25% increase over $4.781 trillion as of one year earlier (Olsen 2011). In addition, the market for exchange-traded funds (ETFs), which are liquid tracking vehicles for standard indices, has grown at an annual rate of 30% over the last three years globally, and is currently estimated to be around $1.4 trillion worldwide according to Deutsche Bank. In Asia, total ETF assets increased by 20-30% annually post 2008 and the number of products have gone up by more than 200%. Currently the total ETF assets in the Asia-Pacific region are estimated at approximately $81 billion (Blackrock 2010)." With this evidence of an increasing interest in indexing management and investing directly in tracking products for standard market indices, both globally and in Asia, the researchers observed that there was little analysis of specifically Asian indices.
Asian countries and indices researched included Japan (Nikkei 225 and Topix 100); China (FTSE China 25 and CSI 300); Hong Kong (Hang Seng); Korea (KOSPI 200); India (Nifty 50); Taiwan (FTSE TWSE 50); Singapore (FTSE Straits Times Index) and for the ASEAN region, the FTSE ASEAN Index, which is built from stocks from Singapore, Malaysia, Thailand, Indonesia and the Philippines.
Key findings from the study revealed that all indices analysed display a pronounced lack of efficiency, in the sense of providing an efficient riskreward trade-off. "For all of them, an equal-weighted index constructed from the same components outperforms the corresponding capweighted market index. The levels of inefficiency of Asian market indices were found to be quite comparable to those of European and US indices".
The study also found that the standard Asian indices were heavily concentrated in a few large-cap stocks. "Most indices allocate as much as 60% of the index weight to only one-fifth of the stocks in the universe. For investors who are interested in holding well-diversified equity portfolios, one can see these results as a motivation to explore whether more appropriate alternatives can be developed."
Asian equity indices showed severe fluctuations in style and sector exposures. The team writes: "For example, the weight of Telecom Services stocks in the Hang Seng index fluctuated between less than 10% and 27% over the period analysed. The weight of Consumer Staples stocks in the Indian Nifty Index fluctuated between 3% and 27%. Market indices in more developed countries (Hong Kong, Japan, Singapore, South Korea and Taiwan) demonstrate relatively more stability, whereas market indices in less developed countries (China and India) display higher variability over time in terms of sector allocation."
A more efficient way to capture the Asian market premium, according to the research, is for investors to use indices designed with an efficient weighting scheme. "In addition to carefully considering their geographic exposure, investors clearly need to consider the weighting scheme that will allow them to extract the equity risk premium for a given geography in the best possible way."
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.