Backing dominant firms in Asia makes sense but identifying their successors provides real alpha

New sectors provide uncertainty

Backing a sector winner is a logical strategy but identifying its heirs is a more challenging alpha generator.

Detailed analysis of stock return profiles shows that companies improving their return on equity (RoE) from the lower quartile to the top tend to outperform in the long term. Selecting these businesses involves identifying certain characteristics, but even if they are found, the maturity of the sector the company operates in is an important factor. In more maturing ‘new economy' areas, such as e-commerce in China, it may make more sense to identify the players that are taking market share from the incumbent. But in more emerging industries, such as electric vehicle components, ofte...