|Robert Horrocks, |
CIO Matthews Asia
Asia invites superlatives. It is both the world’s largest continent and its most diverse by virtually any measure. It also has the fastest-growing economy in the world, currently representing one third of global GDP and more than half of the planet’s annual growth. But despite the size and undeniable global impact of Asian markets, North American institutional investors have often found the prospect of accessing them daunting. Uneven governance, risk and compliance (GRC) practices and the unfamiliarity of the Asian business landscape have created barriers to engagement. But in a challenging global investment landscape, Asia — with its powerful growth engine in the form of a rising consumer class — presents an opportunity that will be difficult to ignore.
Against this backdrop Matthews Asia commissioned a study from Institutional Investor Research to explore North American investors’ priorities and strategies for investment in Asia. The study, conducted in early fall of 2016, included a survey of 116 North American institutional investors, supplemented by a series of in-depth interviews with senior decision makers at large pension funds, foundations, and endowments. We sat down with Robert Horrocks, CIO of Matthews Asia, to get his views on this research and what it means for North American investors.
Q: Few would deny the potential for growth in Asia’s markets— 89 percent of respondents to our recent survey agreed that the opportunity will be too great for investors to ignore over the next five years. Where should investors focus their attention?
Robert Horrocks: Some of the most interesting markets are just embarking on capital market development, in countries like Myanmar, Cambodia, and Vietnam. There are also opportunities where growth is starting to become more sustainable because political systems and institutional order have recently improved, as they have in Bangladesh and Pakistan.
|Asia contains the highest and the lowest points on the planet, the most varied forms of life, the widest array of human cultures—and the fastest- growing economy in the world.|
Let’s focus on Bangladesh for a moment. Bangladesh has a population of 165 million people. By population size, it’s bigger than Russia, which has 127 times as much geographic territory but only 140 million people. There were no phone networks in Bangladesh five years ago, but as the country has stabilized politically, the telecommunications market is exploding there. That presents a tremendous opportunity. But it’s important to remember that, ultimately, you’re investing in businesses, not sectors, and you have to make sure those businesses are well governed.
On that point the research suggests that uneven GRC standards continue to be a major barrier to investment in Asia. Do you agree?
Governance standards do vary across the region. That’s why it’s so important to focus on the fundamentals of investing in Asia: Which companies are paying dividends? What management incentives are in place? What does the ownership history look like? Seeking in-depth answers to these questions is the path not only to overcoming GRC-related shortcomings but also to identifying the strongest opportunities. The GRC environment is one of the major reasons we are active investors in Asia.
North American investors participating in the survey seem, in general, to be more familiar with Asian equity than with Asian debt markets. Are they missing an opportunity?
In an environment of low or even negative interest rates, income-seeking investors are searching desperately for more attractive alternatives. Many are finding them in Asia’s sovereign and corporate bond markets. Investors in Asian local-currency sovereign bonds can earn yields of 6 to 12 percent in fundamentally improving countries like India and Indonesia. For investors seeking corporate bonds, Asian U.S. dollar–denominated high-yield debt has historically offered superior risk-adjusted returns compared with all other regions, including emerging markets. Our analysis suggests that current spreads present an attractive entry point for investors who have a medium-term horizon.
|Download the complete Institutional Investor |
Research report: matthewsasia.com/institutional
What advice can you offer North American investors thinking about making a dedicated allocation to Asia, possibly for the first time?
Asia’s dynamism tempts people to become speculators rather than investors. But the nuts and bolts of good investing are the same as they are elsewhere: a long-term, strategic approach that ignores the noise of passing headlines and short-lived trends. Institutions should look for an investment partner that understands the region deeply and has embedded fundamental research and due diligence into its bedrock. These are the principles that we’ve adhered to in the 25 years we’ve been focused on Asia investment. We believe they’re the best path to identifying opportunity amid Asia’s ever-changing economic, political and social dynamics — while avoiding undue risk.
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The views and information discussed herein are as of the date of publication, are subject to change, and may not reflect current views. They are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Past performance is no guarantee of future results. The subject matter contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia does not accept any liability for losses either direct or consequential caused by the use of this information.