Looking at equities in general, the past three years the singular market indices of China, Hong Kong and India have each outperformed the broader Asia-Pacific ex-Japan equity index, said Luke Ng, vice president of FE Advisory Asia.
Looking further inside the China and India markets reveals that small cap indices have outperformed the large cap indices during the same period.
Therefore, it should be no surprise that the top performing funds in the region show a significant allocation to small cap companies.
A look at the comparative rise in small- and large-cap indices:
One factor in performance has been that the expected earnings growth of small-caps in the region looks better compared to large-caps, Ng said.
Hong Kong’s small cap index has lagged the other markets, but that is expected to change. China’s moves to open its markets further to foreign investors will likely provide added momentum.
The launch of the Stock Connect in November last year and the recent announcement about the 1 July launch of the mutual recognition of funds have led to a huge market rally.
The cross-border fund initiative in particular is expected to drive more capital flows into the Hong Kong market due to the more realistic valuations of H-shares compared to the China-listed A-share counterparts.
Consumer discretionary, financial and information technology companies dominated the portfolios of the top five performing small-cap funds.
The weightings are close to the sector weights in the MSCI Asia-Pacific ex-Japan Small Cap Index, said Ng.
The financial sector has nearly a 20.3% weighting in the index, followed by consumer discretionary (19.6%) and technology companies (15%).
Asia’s top fund by performance over the trailing three years was UOB Asset Managment's United China-India Dynamic Growth Fund, with a nearly 158% return. Although the fund invests in companies in China and India, it does not primarily target small cap companies.
However, the next five funds ranked by performance were all small cap-focused, according to FE data: