[GRTV] Benefits of Asia ETFs

Susan Edmunds speaks with Aleksey Mironenko partner and chief distribution officer at Hong Kong-based Premia Partners about what their Asia-focused ETF investment solutions have to offer.

Tuesday, February 18th 2020, 4:55PM

Welcome to Good Returns TV. I'm Susan Edmunds. I'm standing in for Philip Macalister today. I have with me Aleksey Mironenko, who's chief distribution officer of Premia Partners. Welcome.

Thank you, Susan.

You have a focus on Asia, is that right?

That's right, yeah.

Can you tell me a bit more about why you look at that region?

Sure. So we're based in Hong Kong, and we set up Premia three years ago because we thought that the asset management industry wasn't doing enough to focus on the growth markets of the world. So there's plenty of choices for US, Europe, New Zealand, Australia investments, but when it comes to China, when it comes to Southeast Asia, India, the growth economies on the planet, there is much less choice, much more expensive choices for fund management.

But arguably, that's where you want to be putting your money over the long term. If you're trying to save for the next 20-30 years, you want to invest in places that are growing 5% a year, not 2% a year, but it's much harder to do that. So we left our previous firms, BlackRock, Vanguard, State Street, and we created Premia Partners in Hong Kong to try to make some products that are low cost and allow easy access to these markets.

Is that something that New Zealanders don't have a lot of access to at the moment, do you think?

To be honest, we're in the early stages of exploring New Zealand, so I'm learning myself. But the sense I have is that the average New Zealander puts money into New Zealand equities and property, Australia equities, and maybe US. If they do anything else, it might be a small allocation to EM, broadly.

But EM is a very big and complex thing. There's Argentina, which is having default issues. There's Eastern Europe with constant threat of war with Russia. There is the Middle East. So you get the good and the bad, but you can be much more granular.

The US is a very well researched market, so investors know what they're getting, but there's a very, very big difference between a Taiwanese semiconductor company and a Brazilian oil conglomerate. It's two completely different things and yet investors just go: "Well, it's EM it's one bucket. I don't need to worry about it."

We think you need to be much more granular and much more selective, not necessarily through an active fund but through exposures that are targeted to where the growth is in EM, because that's ultimately the goal. You don't want to buy slow-growing EM. That's twice the risk and the same return. If you're going to take the extra risk of going into EM, you should be rewarded for it with more growth.

Okay, so at the moment you see more opportunity for growth there than perhaps the more maxed-out markets of the world?

Yeah, I mean, it's a hard thing to say because over the last 10 years, nothing has beaten the US, really. But if you think about where we are today, the US is at a forward PE, priced equity, of 19. Asia is at 13. It's much cheaper. You're paying less for more growth. We like that equation. That gap, 19 versus 13, that's the biggest in 10 years that we've had.

Now, the problem is, a lot of people have been saying this for awhile, "EM's going to outperform, EM's going to outperform", and it hasn't.

There's a structural problem. EM is full of bloated, state-owned, old economy type of companies. Most of us, when we think about EM, we think about low-cost export manufacturers. We think about oil companies. Well, these are the things that are doing worse and worse. As we transition to sustainable energy, oil companies – which are a lot of EM firms – are doing worse.

But if you look at the structural story in EM, EM consumers are embracing technology much faster than developed market consumers. China is greying much faster than any other country in history.

There are these interesting growth stories that are performing incredibly well, but most investors are under-invested in them because they own Facebook, Amazon, Alibaba, Tencent. They don't own Chinese pharmaceutical companies. They don't own the largest tech conglomerates in Korea. They might own Samsung, but they don't own the local companies that are serving local consumers.

Is that just a lack of knowledge on our part, that we don't know that market so well?

Not just New Zealand. Even in Asia, we have a lot of clients who don't invest in some of this, because if you look at the standard benchmarks, EM is 10% of the All Country World Index from MSCI. So for a lot of investors, it's more important to get their US allocation right, or their home buyers New Zealand allocation right, than to get really granular in EM.

Are you taking an active approach?

So we kind of sit in the middle of the world. So sometimes people say smart beta or quantitative investing. Our premise is very simple. We can make an ETF, so still very low cost relative to active fund management, but instead of simply buying a market cap benchmark for MSCI Asia for example, we will say, "No, we want to own China's tomorrow". So we want to make an index that targets quality growth companies in China's new economy.

We can say we don't want banks. We don't want energy companies. We don't want manual labour manufacturers. We want tech, consumer, healthcare, education, environment industries. We want companies that are low debt, high profit, high growth.

These are all things you can do now in an index. You get a much better result than, say, buying the standard default market cap benchmark for China, which, yes, it'll have a few famous stocks like Alibaba and Baidu and Tencent, but it will also have a lot of old economy state-owned banks. It will have the oil companies. It will have the coal companies. It will have Chinese tobacco companies.

How worried are you about coronavirus in your investments at the moment?

I did not fly from Hong Kong yesterday, I flew from Japan. But look, we actually published a piece on this a couple of weeks ago. Every virus outbreak that we've had in the last 20 years, if you look at the six month return of whatever market it happened in, it's been positive.

So there is no question that there is a Q1 economic slow down, and not just in China. It's going to have effect globally. Foxconn, which is Apple's main supplier, restarted one week late after the Chinese holiday and they are currently at less than 30% capacity. So even Apple is going to have a problem.

But it's a short-term problem. Markets don't care about human suffering, unfortunately, they only care about forward projections, and the reality is that in situations like this, governments step in, they provide credit lines, they extend deadlines, and there will be pent up demand. So Foxconn will run right now at 30% capacity, and in three months they'll be running at 120% capacity to make up for it.

I see.

So we expect, clearly, a Q1 dip in earnings of Chinese companies, if not global companies, and in GDP numbers, without question.

Q2 will be less bad. Q3 will probably be great, and maybe earlier, maybe later. We're not scientists, so that's for someone else to judge, but it's very clear that this virus, while having a very fast transmission, seems to have a much lower mortality rate than some of the past epidemics we've had.

China, rightly, wrongly, has sacrificed a province to save the country and the world, and it seems to be working in terms of a slowdown and limited infections outside of that region.

Okay, that makes sense. So how would you see your funds fitting in with the rest of a New Zealand investor's portfolio, say?

Excellent question. So if you think about what a portfolio should accomplish, one, it should generate good return, and two, it should be diversified so that those returns don't only happen at the same time. So you have some good with bad and vice versa, right?

So if you look at US versus New Zealand, which are two standard allocations for a New Zealand investor, the correlation is about 0.4, pretty good diversification. What's interesting about Asia ex Japan is that the correlation with US is 0.6-0.7. With New Zealand it's actually a bit lower 0.4-0.5.

But we don't invest in Asia because, again, we're trying to get not just the good and the bad, we're trying to target specific structural growth themes. So our China new economy has a 0.3 correlation with New Zealand and with the US, so it's very complementary to both those existing allocations.

Our Southeast Asia exposure, which is something that very few investors globally touch, everybody knows China, India, but they ignore Southeast Asia because each individual country is small, but together, 700 million people, 5% GDP growth. The correlations are even lower, 0.2 versus New Zealand.

Those all seem like things that make sense, even intuitively, without doing further analysis, and that's why we're excited about spending time in New Zealand, and talking to investors, and explaining what we do.

Great. Well, thank you very much for being here. It's been really interesting.

Thanks for having me.

Tags: Asia ETFs GRTV Interview investment Premia Partners