Asian small cap funds offer investors the opportunity to invest in a part of Asia’s wide investment universe that features some of the fastest-growing companies in the region.
And the Asian small cap universe is a place to find hidden gems. Why? Because 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.
And as trends like e-commerce, cloud computing, 5G equipment, and digital banking accelerate across the region, many small-cap companies are in the driving seat.
Here we profile three of the biggest Asia small cap funds on the market and evaluate which might be best for your portfolio.
PineBridge Asia ex Japan Small Cap Equity Fund (USD, ISIN: IE00B12V2V27)
Pinebridge’s Asia ex-Japan small cap equity fund is the largest (assets under management (AUM): EUR 1.01bn), as of May 5, 2020, and longest established (inception date: April 4, 2006) of the three profiled funds.
Managed by Hong Kong-based Elizabeth Soon since October 1, 2008, this actively-managed fund benchmarks against MSCI AC Asia Ex JPN Small Cap NR USD.
Tilted to Greater China
Greater China accounts for 55.2% of the portfolio. By geography, the fund is overweight China (15.8%, benchmark (BM): 10.9%) and Hong Kong (20.7%, BM: 6.8%). Notably, the fund is significantly underweight to Australia (fund: 14.7%, BM: 20.8%), South Korea (fund: 3.5%, BM: 15.0%) and Singapore (fund: 1.2%, BM: 5.4%).
Overweight to Information Technology
Information technology (IT) is a key sector overweight (fund: 27.9%, BM: 17.8%), followed by industrials (fund: 17.0%, BM: 12.3%) and consumer staples (fund: 7.4%, BM: 5.3%).
In line with the positioning in IT, Appen, an Australian data and AI firm, and Sinbon Electronics, a Taiwanese electronics company, are two of the largest holdings in the portfolio.
Generates sustained alpha, charges highest fee
In AsiaFundManagers.com’s fund scoring*, Pinebridge’s Asia ex-Japan small cap fund scores 62.07 out of 100. The fund scores highest for returns and information ratio over one, three, and five-year periods.
However, investors will pay for performance: the fund charges the highest management fee of the three funds profiled.
Fidelity Asian Smaller Companies (Y-Acc, USD, ISIN: LU0702159939)
Fidelity Asian Smaller Companies equity fund ranks second in terms of AUM (EUR 826m) and history (inception date: December 7, 2011) and is a more pan-Asia fund than the other two funds profiled.
Actively managed by Singapore-based Nitin Bajaj since September 2, 2013 against the MSCI AC Asia Ex JPN Small NR USD benchmark, the fund invests in small companies under a market cap of USD 5bn.
Diversified and tilted to Emerging Asia
By geography, the fund’s main allocations include China (20.7%, BM: 10.9%), and India (fund: 24.1%, BM: 10.6%). Key country underweights include Australia (fund: 2.3%, BM: 20.8%), Taiwan (fund: 5.5%, BM: 20.0%), and Hong Kong (fund: 5.9%, BM: 6.8%). Despite having some underweights, this fund is more diversified across Asia, with a particular tilt to Emerging Asia, i.e. China, India, Myanmar, Indonesia, and the Philippines.
Strong positioning in consumer sectors, underweight IT
Overweight positions in consumer discretionary (fund: 20.9%, BM: 13.6%) and consumer staples (fund: 8.3%, BM: 5.3%) are a key difference with the other two profiled funds.
Furthermore, the fund has key underweight positions in IT (fund: 11.8%, BM: 20.8%), materials (fund: 5.5%, BM: 9.11%), and real estate (3.4%, BM: 12.5%).
Recent performance & alpha generation a key detractor
In our fund scoring, Fidelity’s Asia ex-Japan small cap fund scores 47.25 out of 100.
Recent performance over the last year is a key detractor for this fund. Despite a decent longer-term record over five years, the fund has underperformed competitors during the past year. Significantly, the fund’s information ratio, and thus alpha generation capability, has steadily declined over time.
HSBC GIF Asia ex Japan Equity Smaller Companies Fund (EUR, ISIN: LU0955569065)
HSBC’s ex-Japan Asian Smaller Companies equity fund is the smallest (AUM: USD 585m), and youngest (inception: September 5, 2014) of the three profiled funds.
Actively managed by Hong Kong-based Ka Wai Fung and Man Chung Kwan the fund is benchmarked against MSCI AC Asia Ex JPN Small NR USD.
Greater China focus, slight tilt to Developed Asia
48.4% of the portfolio is allocated to Greater China, making the region a dominant part of the portfolio, though with less exposure than the Pinebridge small cap fund profiled above.
The fund has higher allocations to ‘developed Asia’ than the two other profiled funds. South Korea (fund: 15.7%) and Taiwan (fund: 21.4%) feature prominently, while the fund has no positions in Australasia. Similar to the Fidelity small cap fund, this fund has positions in Emerging Asia, but the scale is smaller, with positions of between 1%-2% in Laos, Cambodia, and Myanmar.
Focused on Consumer Discretionary, Financials and Industrials
By sector, consumer discretionary (fund: 21.23%, BM: 13.6%), financials (fund: 14.5%, BM: 7.06%) and industrials (fund: 13.21%, BM: 12.32%) stand out as key overweights in the portfolio.
Scores low on returns, alpha generation and transaction fees
HSBC’s Asia ex-Japan small cap fund scores 47.25 out of 100, putting it in third place of the three funds profiled. Poor returns over a one- and three-year time period, plus negative information ratios, are key factors weighing down the overall score.
Additionally, the fund charges the highest transaction fee of the three funds profiled and has the highest hurdle rate, requiring a minimum USD 5,000 investment.
Conclusion – Asian small caps
For investors looking for a sustained track record of delivering returns and generating alpha, Pinebridge’s Ex-Japan Asia Small Cap fund may be preferable, since it outscores on these key indicators.
However, the Pinebridge small cap fund comes with the highest management fee (1.8% p.a.) and is heavily weighted to Greater China – particularly mainland China – and to the IT sector.
Investors seeking a strategy with more diversification across Asia might firstly consider the Asian small cap funds run by Fidelity and then HSBC.
Additionally, investors looking for a heavier weighting to the Asia consumer story may again consider Fidelity and then HSBC, the former having the strongest allocation to consumer sectors.
Finally, the Fidelity Asia small cap fund may suit investors looking for a tilt away from China to other countries in Emerging Asia, such as India, Indonesia, Myanmar, Cambodia, and Sri Lanka. Allocations to these countries strongly differentiate the Fidelity strategy from the other two profiled here.
*About the Fund Scoring
To help investors find the best investment funds from a variety of registered products, the AsiaFundManagers.com team has developed its own quantitative fund scoring system. The Fund Scoring is based on current scientific findings on the quality of actively managed investment funds. An algorithm is used to weight different factors that provide information about the quality of the fund. The parameters include return, risk and cost ratios. The Fund Scoring calculates 8 sub-indices and an overall score, which is made up of the weighted sub-indices. Investment funds can achieve a maximum of 100 points for sub-indices and the overall score.