By Mohamed Ali Bernat Concentration of the top stocks in Asian emerging markets indices is resulting...
By Mohamed Ali Bernat
Concentration of the top stocks in Asian emerging markets indices is resulting in near-uniform portfolio holdings by fund managers, according to Fidelity's K C Lee.
Lee, addressing the Investment Week Markets Forum 2000 via satellite from Hong Kong, said the extreme concentration in Asia ex-Japan markets was partly the result of investors valuing a stock by which industry it was in rather than how efficiently it managed its capital.
He said: "The danger is that some of the stocks in the technology, media and telecom sector are mis-priced. This could encourage the management of these companies to make poor investment decisions, which could have a profound impact on the country's economy, as witnessed in the Asia crisis of 1997.
"Three quarters of the Korean stocks I followed have at least halved from the highs recorded last year and the market has been held up by just two companies: Samsung Electronics and SK Telecom."
Lee added that Samsung now accounts for 21% of the Korean stock market where it had only accounted for less than 10% a year ago. A similar story could be told for SK Telecom, which represents 11% compared to 3% a year ago.
The top five companies in the Korean market account for 54% of the index, according to Lee, of which four tech, media and telecoms stocks represent 47% of the market. The top five companies in Hong Kong account for 71% of the market, 44% accounted for by just three companies following technology and China Mobile, previously China Telecom, makes up 27% of the index alone.
Singapore's index has 53% in the country's top five companies although only Singapore Telecom, with a market weighting of 22%, is a technology-related stock. Lee said this level of concentration is a big problem for single country fund managers, who are usually restricted to 10% in any one stock and were, therefore, passively underweighting the largest stocks in these markets. At the same time, index tracking funds, which are not subject to the same restrictions have generally performed better than actively managed funds as a result.
Regional portfolio managers do not have the same problems as greater diversity means that large cap stocks will not breach the 10% limit, according to Lee. Still, he said performance is increasingly determined by a small group of stocks.
Asia ex-Japan funds have very similar companies in their portfolios, with Taiwan Semiconductors, Infosys, Samsung, China Mobile and Hutchison the key holdings in almost every portfolio with the difference in weighting narrowing as they approach the 10% limit.
He said: "The risk is that consensus has swung to an extreme with almost every fund manager concentrated in a few tech stocks and the risk is that if this theme falls out of favour there will be widespread underperformance."
Lee added that investors who shared his views would be best advised to invest in Asia ex-Japan funds that were not too heavily concentrated in the same stocks but, at the same time, be wary of portfolios that diversified their holdings into companies that had little or no track record.
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