Risky business - Hong Kong investments - Brief Article

Business Asia, August, 2000 by Nick Edwards

Should you invest in a country, or a sector? NICK EDWARDS reports from Hong Kong on a critical dilemma facing fund managers in Asia

GLOBALISATION AND the burgeoning "new economy" have sent interest soaring in sectoral investing, but country risk is the major obstacle to a radical rethink of institutional asset allocation in Asia.

A two-year hike in hi-tech growth stocks has spawned dozens of retail mutual and venture capital funds, but cautious pension fund players in control of trillions of dollars refuse to reject strategies based on geographic exposure to emerging market risk.

"Country risk still supersedes sector risk," says Barbara Shaw, Hong Kong-based head of Asian investments at AXA Investment Managers.

"Asia is still an emerging market and in emerging markets you have to pay a lot of attention to risk," says Shaw, whose firm is part of French insurance and pension provider, AXA Group, one of the world's five largest investors with about US$789 billion under management globally.

But the influence of sectors is growing, especially from an analytical standpoint where fund managers say sectoral comparisons supplement stock picking.

"The trend is clearly towards sectoral investing," says Angela Fung, vice-president of investor communications at Dresdner RCM Global Investors Asia. "We're using it as another tool right now."

Prudential Portfolio Managers (PPM) split its analytics team into six sectors 18 months ago and AXA-IM reorganised its analysts and portfolio managers at the start of this year to have a sectoral and regional focus.

The lack of any meaningful benchmark is another factor restraining fund managers from fundamentally shifting strategy.

Global index compilers seem to have ignored the sectoral phenomenon until earlier this year when both FTSE and Morgan Stanley Capital International (MSCI) modified or launched products to offer global sectoral analysis.

Index compilers such as FTSE recommend global funds have no more than 4.7 per cent of portfolios invested in emerging Asia.

The world's top 10 investment firms have about US$7.5 trillion under management and analysts reckon there are fewer than 50 stocks in Asia ex-Japan with adequate liquidity for top fund managers to buy and sell without moving the markets.

In many cases a switch to a totally sectoral allocation strategy would find institutional investors basing their view of an entire country on just one or two stocks.

"Obviously if your clients ask you to perform in line with sectoral indices, one has to. But our clients are still benchmarking along the lines of country weightings," says Oscar Wong, managing director of Prudential Portfolio Managers (Asia).

Retail fund sellers can point to the dramatic out-performance of Asia's hi-tech sector against country indices for at least 12 months, or even longer.

South Korea's Samsung Electronics -- the world's biggest computer memory chip maker -- has rocketed 304 per cent since January 1999, about 10 times the benchmark Korea Stock Price Index gain of 31 per cent. But institutional investors are not at all confident that globalisation of the computer chip industry could insulate a sector-based investment in Taiwan, for example, from the political risks it faces domestically and from mainland China.

"We still like Taiwan for the technology exposure, but a lot of macro and political factors are telling us we cannot stay overweight. I've moved to neutral because of these overwhelming issues that are not sector related," AXA-IM's Shaw says.

The sovereign-over-sector argument also plays out in banking and financial services as Asia struggles with the painful reform program forced on the region by 1997's financial crisis.

Investors have quit Thailand's banking sector in droves this year, sending the Thai banking index down 49.1 per cent to close at a new 2000 low of 151.00 recently.

Hong Kong's banking and finance index had rallied 23.6 per cent recently from its year low in May and was down just 6.7 per cent for the year.

Many fund managers say sector investing only pays at the start of an upswing; differentiation and stock picks count later.

"Certainly we don't see a shift coming too quickly," says PPM's Wong.

"Obviously for mutual funds, themed funds have been in favour for the past few years, but institutions will take longer to get into that. It could well be another five or 10 years," Wong says.

-- Reuters

COUNTRY RATINGS (Short-term market grades)

(a) = HIGH RISK

(b) = VERY LOW RISK

China            3
Hong Kong        2
India            3
Indonesia        5
Japan(b)         1
Malaysia         3
North Korea(a)   6
Philippines      4
Singapore        1
South Korea      3
Taiwan           2
Thailand         3
Vietnam          5

SOURCE: EFIC

RELATED ARTICLE: ASIAN BOND YIELDS LOSE OUT TO `JUNK'

BY RICHARD HUBBARD IN HONG KONG

Emerging Asia's benchmark bonds are paying the price for moving up the risk curve, under-performing their lower-quality European and Latin American peers, which are enjoying bumper returns this year.

The big Asian sovereign bonds tracked by investors and investment indices reaped dividends last year when the market began pricing in their anticipated transformation from junk to investment grade.