One of the endless debates in the world ofinvesting, is whether active or passive is better.
Active managers claim to be able to "beat themarket". That is that when the market (or their chosen benchmark) rises
their fund will rise more, and when it falls their fund will fall less.
Advocates of passive investment say that this isnot consistently possible and so there is no point in paying for active
management. Instead investors should opt for a passive fund which simply tracks
the performance of a market index or benchmark.
Increasingly the passive argument appears to bemore valid. Very few managers can consistently beat their benchmark or index.
Though there is also a valid counter argument that were it not for active
investors, passive funds would not perform at all!
Our view is that there is a place for bothstrategies in a portfolio. In general, we believe that the further West one
invests, the weaker the active argument is. If you were looking to invest in
America, then an S&P500 ETF may very well be the best option. Conversely
the further East you look, the case for passive investment may appear more
risky.
Asian markets are generally less mature andcorporate governance is often held to a different standard than in the West. As
such, "price discovery" is less simple. There is also far more
political risk to be taken into account. Recent events in China have brought
this to the fore.
More recently there has been the impact ofPresident Xi's "Zero COVID" policy. with long-running lockdowns of
mega cities such as Shanghai. Many had expected this policy to be relaxed once
Xi had been formally made president for an almost unprecedented third term, at
the party Congress in October this year. While Xi made no mention of any
change, after the Congress had finished rumours circulated of a subtle
relaxation being implemented. The market duly soared.
However the vaccination rates in China are low(particularly among the elderly, who are must susceptible to the disease) and
the domestic vaccine appears to be far less effective than the Western
versions. So when a loosening last month led to a huge rise in cases, further
lockdowns were announced. The ensuing protests against Xi and the Chinese
Communist Party have not been seen since the Tiananmen Square massacre in 1989.
These are now truly dangerous and uncertain timesfor China and it's population. Investors hate uncertainty. You would therefore
expect an Asian fund manager to be reducing their exposure to China. An
investor in an ETF has no such option. The holdings in an ETFare determined by the relative value of the companies in the index. Alibaba
makes up almost 3% of the the Asia excluding Japan index, and so an ETF must
invest three percent of its money in that company. The prospects of the company
and the political risk affecting it can never be taken into account
Interestingly, as at the end of October at least,one excellent Asian manager (Matthews Asia) had a very similar weighting to
China as its benchmark:
However, being able to chose which firms to investin has led to quite differing results for Matthews' Chinese holdings:
With the turmoil of this year and now surely a lotmore to come, this is a great chance for active managers to prove their worth.
Those invested in the ETF will simply have to ride it out - as the likes of
Tencent and Alibaba will remain among the most valuable companies in Asia and
so continue to be major holdings in the ETF regardless.
It will be fascinating to see firstly how theMatthews portfolio has changed (this is reported quarterly, so we shall see at
the end of this month), but also how the two fair over the coming months and
years now.
As always, nothing contained here should beconstrued as advice. Anyone interested in discussing their investment portfolio
should get in touch.