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Investors seeking growth and diversification in their portfolios can look beyond familiar horizons. One such horizon that has been increasingly catching the eye of savvy investors is Asian small caps.
The allure of Asian small-cap stocks lies in their unique characteristics, which distinguish them from their larger counterparts. While large-caps often hog the spotlight, Asian small companies are relatively under-researched by both the media and the sell side, which opens up opportunities for active local managers to find hidden success stories.
One of the key factors driving interest in these stocks is their exposure to pivotal trends shaping the Asian economy. Experts believe that the rapid shift from offline to online, the relentless march of technology and innovation, and the booming healthcare and electric vehicle (EV) sectors in the continent are all areas where small-cap stocks have the potential to shine.
Additionally, for investors seeking solid returns, the performance of Asian small-caps has been particularly noteworthy. The MSCI AC Asia Small Cap Index provided year-to-date (YTD) returns of 12.02%, three-year returns of 5.93%, five-year returns of 3.50% and 10-year returns of 6.13%.*
In contrast, the MSCI AC Asia Index, which captures large and mid-cap representation across Asia, has delivered YTD returns of 6.34%.* Furthermore, the index’s three-year returns declined by 0.51%, its five-year returns amounted to 1.62%, and its 10-year returns stood at 4.76%.* In each of these timeframes, the MSCI AC Asia Index underperformed the small-cap index.
How to invest in Asian small-cap funds?
Considering the potential within Asian small-cap stocks, we take a look at three Asian small-cap funds.
Fidelity Funds – Asian Smaller Companies Fund A-ACC-USD
Launched in 2011, this fund’s primary objective is to achieve superior performance by employing a bottom-up security selection approach rooted in fundamental analysis within the smaller companies universe of the Asia Pacific region, excluding Japan.
The fund has total assets under management of $1.247 mn. The Fidelity Asian Smaller Companies fund is benchmarked against the MSCI AC Asia Pacific ex Japan Small Cap Australia Capped 10% Index (Net). The fund has a maximum initial charge of 5.25% and a management fee of 1.50%. Among the funds listed here, this particular fund has the highest ongoing charges of 1.94%.*
Year-to-date, the fund has achieved a cumulative growth of 7.9%, while the benchmark has reached 12.4%. Over the past five years, the fund has grown by 27.3%, in contrast to the benchmark’s 30.6%. Since its inception, this Fidelity fund has demonstrated cumulative growth of 177%, significantly outpacing the benchmark index, which has grown by 94.4%.*
The fund’s top five major holdings as of August 31, 2023 include Axis Bank from India (3.3%), BOC Aviation, a state-owned global aircraft operating leasing company based in Singapore (2.4%), WH Group, a Chinese multinational meat and food processing company (2.4%), Bank Mandiri Persero Tbk Pt, an Indonesian banking giant (2.2%), and Granules India, an Indian pharmaceutical manufacturing company (2.1%).
In terms of sectors, the fund has the biggest investments in financials (19.4%), industrials (15.1%), consumer discretionary (14.7%), consumer staples (10.6%), and IT (7.9%). Geographically, nearly half of its holdings are concentrated in China (27.1%) and India (21.4%), with Indonesia (11.5%), Hong Kong (9.9%), and South Korea (8.9%) rounding out the top five country holdings.*
Having joined Fidelity in 2003, Nitin Bajaj has been the portfolio manager of this fund since 2012.
AXA IM AC Asia Pacific ex Japan Small Cap Equity QI B-ACC-USD
Launched in 2000, the AXA IM AC Asia Pacific ex Japan Small Cap Equity aims to achieve long-term capital growth, aiming for a total annual return on investment of approximately 4% above the annual return of the MSCI AC Asia Pacific ex-Japan Small Cap Index over a rolling three-year period.
The AUM of the fund amounts to $111.55 mn. The AXA Asia Pacific ex Japan Small Cap Equity fund imposes ongoing charges of 1.8%. Over the past five years, the fund has exhibited cumulative returns of 25.93%, below the benchmark returns of 28.57%. YTD, the fund has delivered returns of 9.41% as compared to the 8.27% returns by the benchmark index. Since its inception, the fund has provided 1,002.39% cumulative returns, dwarfing 643.55% returns by its benchmark index.**
The top 5 holdings of the fund include the Australia-based technology company operating in the motor vehicles sector, Carsales.com (1.76%), Australian consumer electronics company JB Hi-Fi (1.31%), the global multinational technology company Cyient (1.30%), Oracle Financial Services (1.30%) and the Taiwanese semiconductor company Powertech Technology (1.24%).*
Unlike the Fidelity fund, this AXA fund has the biggest allocation in IT (21.11%). Along with this, industrials (15.63%), financials (15.03%), cyclical consumer goods (14.50%), and materials (11.28%) make up the top five sector holdings of the fund.*
In terms of country allocation, Taiwan (21.65%) and Australia (21.62%) account for almost half of the portfolio, followed by India (18.01%), South Korea (15.59%), and China (6.21%).*
Allianz Asian Small Cap Equity AT15-USD
This Allianz fund focuses its investments on companies based in Asia (excluding Japan) with market capitalizations that do not exceed 130% of the capitalization of the largest stock in the MSCI AC Asia ex-Japan Small Cap Index.
The fund has total assets under management of $120.43 mn and is benchmarked against the MSCI AC Asia ex-Japan Small Cap Total Return Net (in USD). The fund has ongoing charges of 1.65% and a total expense ratio of 1.65%.*
Yu Zhang, with around 16 years of experience in portfolio management, has been overseeing the fund since April 2023.
In the last five years, the fund has given 38.79% returns, outperforming its benchmark index returns of 30.77%. Along with that, the fund has risen 9.90% year-to-date, as compared to the 14.25% rise in its benchmark. Additionally, since its inception in 2014, the Allianz fund has generated 144.79% returns, way more than the 46.06% returns by the fund’s benchmark index.*
The fund’s top five holdings include Taiwanese semiconductor company Alchip (5.40%), machine industry company Sunonwealth Electric Machine (4.32%), Singapore-based real estate engineering services company Sembcorp (4.02%), Chroma ATE (3.99%), and Moshi Moshi Retail C-foreign (3.89%).*
Like AXA, Allianz has the highest allocation in Taiwan (28.7%). This is followed by India (17.4%), Indonesia (10.9%), China (9.8%), and Vietnam (7.6%). Sector-wise, more than 50% of the fund’s holdings are concentrated in IT (30.7%) and consumer discretionary (27.1%), followed by industrials (16.9%), healthcare (10.3%), and consumer staples (4.8%).*
*As of August 31, 2023
** As of September 22, 2023
