The high stock concentration in national indices is being countered by the regional investment appro...
The high stock concentration in national indices is being countered by the regional investment approach taken by most fund managers in the Asia region.
Korea Telecom constituted over 30% of its domestic market as at 5 July with SK Telecom accounting for 16.5% and Samsung taking up more than 20% of the market.
Phillipa Gould, a director at Schroder Investment Management, says the high concentration of stocks on the indices can give fund managers the opportunity to outperform the market substantially by holding stocks outside the benchmark.
MSCI aims for its individual country indices to cover 60% of market capitalisation and 60% of each industry group, potentially opening up big opportunities for active managers.
In Korea last year, some of the largest stocks were not on the index.
Gould cites Korea Telecom, which only joined the index in May 2000, as a stock which helped Schroders outperform the Korean market.
MSCI Korea was down 0.28% for the year ending June 2000 in local currency terms, whereas Korea Telecom actually was up 27.86% over the same period, resulting in an outperformance of just over 28% in the 12 months to June 2000.
A similar situation developed in Hong Kong, with China Telecom, now China Mobile, which was not listed on the stock exchange until recently.
Peter Hames, a director at Aberdeen Asset Management, says it helps not to be index driven when choosing stocks.
He adds: "The problem with any index is it is backward looking, by which I mean it uses historical data. Our view is indices are changing dramatically and we are looking at how markets will look in the future." Hames adds Korea's entire economy is dominated by a few big groups like Hyundai, Daewoo, Kepco and Samsung.
"This makes the indices quite volatile because, if two or three stocks move, the whole market is dragged along with them," he says.
Taiwan has large business conglomerates but these are not as diversified as the Korean chaebols and display a more profit-oriented methodology thanks to their strong supply and business links to North America. Hames is underweight the country, as he feels valuations look high and the country is vulnerable because of its ties to the US economy.
Gould says Far East technology stocks are increasingly correlated with the vagaries of the Nasdaq, leading to greater volatility.
Not many companies outside the index are showing signs of growth, according to Gould, while non-TMT alternatives in the index like Kepco, Korea's national power supplier, and Posco, a steel manufacturer, are stable investments but hardly likely to outperform other sectors.
Banks take a reasonable portion of the Singapore market as do Singapore Airlines and Singapore Press Holdings but this points to a more diversified market, according to Hames., who is overweight the country. FMRT, a rapid transport operator, and Port of Singapore are also expected to take sizeable weightings when listed on the exchange later this year.
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