When markets are buoyant, active investing can seem old-fashioned. Why bother with all that research – looking at cash flow, monitoring sales growth, meeting management – when an index fund is giving you a good return without any of the effort? However, the merits of active investment are not most evident in good times, but in more difficult times. This is particularly true in the volatile markets of Asia.
Asia has much to recommend it as a place to invest, but stability is not one of its defining characteristics. Emerging markets will go up and down depending on what is happening globally as much as their domestic situation. They will be buffeted by changes in the US dollar, in commodities prices, in investor sentiment. Often these bear little relationship with the fortunes of emerging market companies, which will only be fully reflected in share prices in the long-term.
This volatility has a number of drivers: These markets often don’t have a well-developed domestic investor base. That means fund flows are disproportionately influenced by global investors who in turn will be influenced by the sentiment in their own markets. This can particularly affect larger capitalisation names, which are often the first port of call for international buyers.
This low domestic investor base also means that turnover is lower in most stocks – there are fewer participants in the market. A pound going in and out has a greater impact on the share price of an emerging market company than it would in a developed market company with lots of shareholders. Again, this creates volatility. Passive investors have no choice but to accept this volatility, while active investors can adapt their strategy to deal with it.
At the same time, the composition of markets – and therefore indices – changes over time. More recently, there has been a substantial increase in technology across Asian indices, and a commensurate decline in commodities. There has also been a significant increase in the weighting of certain markets, notably China. This means indices are less sensitive to global economic growth than they might have been a decade ago. This may be good or bad, but it means investors may not necessarily get the type of exposure they expect by simply investing in an index.
Indices may also not reflect the strongest sources of growth in an economy. At worst, the largest companies may be stodgy, state-owned enterprises. Emerging markets are far more dynamic than developed markets – new companies come in, old companies die. One of the big differences between emerging and developed markets is that in emerging markets, stock markets are still considered a way to raise capital. This creates a lot of dynamic change that is not always fully reflected at index level; in contrast, stock pickers can reflect these shifts in their portfolios.
From our point of view on the Aberdeen New Thai Investment Trust, we recognise that Thailand has not always been politically stable and we believe it is best to retain the firepower to deal with that. We invest conservatively, looking to protect the downside, in those companies that display good governance. These are not necessarily the largest companies in the index and as such, believe active investing can help protect wealth when the environment is tougher.
By: Adiethep Vanabriksha, Senior Investment Manager, Aberdeen New Thai Investment Trust PLC
Risk factors you should consider prior to investing:
The value of investments and the income from them can fall and investors may get back less than the amount invested. Past performance is not a guide to future results.
Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
Movements in exchange rates will impact on both the level of income received and the capital value of your investment. There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
Other important information:
Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.
Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1YG. Registered in Scotland No. 108419. An investment trust should be considered
only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal
Find out more at: www.newthai-trust.co.uk