PineBridge's Soon: The biggest myths about investing in Asian small caps
Familiarity matters at times of volatility, manager argues
Investors should reposition their portfolios less as opposed to more in the throes of US-China trade war volatility, according to PineBridge Investments' Elizabeth Soon.
The manager, who has headed up the $722m Ireland-domiciled PineBridge Asia ex Japan Small Cap Equity fund since 2008, said the turnover of her portfolio - which has historically sat between 30% and 50% over her tenure - has dropped to 20% to 25% over the last couple of years.
"People tend to think that the more volatile the market, the more you should trade, but my opinion is the more volatile the market, the more you should stick to the ones you know," she argued.
"This is because there is a lot of newsflow out there and this can impact the choices of the managers. So sometimes, it is better to just switch off, and go and study your own companies."
Soon, who currently runs a portfolio of 62 small-cap Asia Pacific stocks, has adopted a bottom-up approach to stock selection throughout her career, focusing her attention on finding the high-growth companies when they are small and nurturing them until they increase in size and thrive, before reducing the positions in question and reallocating to the "exceptional growth" companies further down the cap spectrum.
Or, as she describes it, investing "across the S-curve" of companies' individual business cycles.
As such, she holds larger companies alongside her smaller holdings, including the likes of Nestlé India and clothing manufacturer Shenzhou International Group Holdings.
She can therefore adopt a more concentrated portfolio than many of her Asia Pacific small-cap peers.
This, she explained, is another misconception when it comes to protecting investors against volatility - such as that caused by the US-China trade war - as having a large number of stocks in a portfolio does not necessarily shield investors from turbulence.
"When I first started in the industry, I was always told you should diversify as much as possible. But, in the past 15 years, in my experience, I have realised it is really about knowing your companies when it comes to reducing the risk,"
said Soon.
"So, because we focus so much on our conviction in individual companies, we do not have a market-cap limit to the stocks we hold.
"When we buy a stock at $0.5bn, and it grows to $3bn, yet we have strong-enough conviction that it will grow to $30bn, we don't need to sell the stock.
"But the spirit of the fund is we will get the proceeds from the larger-cap stocks and distribute them to the smaller caps.
"As we phrase it, we hold companies from acorns to oak trees."
Contrarian
In fact, it is Soon's unconstrained and fundamentals-based approach that has led her to some contrarian positioning within the portfolio.
Why China will weather the trade war
For instance, the fund is significantly overweight the industrials sector at 22.4%, compared to its MSCI AC Asia Pacific ex Japan Small Cap Daily Total Return Net index benchmark's 13.2% weighting.
While many Asia Pacific investors have avoided the sector due to trade war fears, as well as China's shift from a manufacturing to a services-led economy, the manager said opportunities abound, so long as investors are selective.
"We take the view that [manufacturing] companies with very strong branding and an overseas end consumer are particularly attractive right now," Soon said.
"These manufacturers may initially make their products in China, but they may also have plants in India or Vietnam.
"And, importantly, many of these Asian manufacturers distribute to brand-loyal and cash-rich consumers in the West.
"We do not avoid manufacturers, because the good ones are very closely related to their customers and it becomes all about the brand.
"The end customers cannot do without these products - it just depends where the orders are based."
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