Taking a ‘whole of Asia’ view in the booming small-cap universe

One of the more impressive funds that The Inside Network has come across in recent years is the PineBridge Asia ex Japan Small Cap Equity Fund, which taps into the “long tail” of Asian exposure – the region’s small caps. 

Of course, what is a “small-cap” is in the eye of the beholder: PineBridge defines that as a free-float-adjusted market capitalization at the time of purchase of less than US$1.5 billion ($2 billion). But let’s not get hung-up on what Australians think of as small-caps – the PineBridge definition covers 90% of the region’s real sharemarket opportunity set, and we think that offers investors true diversification, into some of the most important economic themes of the 2020s, and some of the fastest-growing Asian companies.

Finding these opportunities in a very diverse set requires a highly disciplined approach, explains Elizabeth Soon, CFA, PineBridge’s head of Asia ex Japan equities. “In Asia ex-Japan, small-caps make up the great majority of all listed companies. PineBridge has been investing in this market since the 1990s, so you can see how strong our conviction is in the long-term opportunities in Asian small-caps.”

As a benchmark-agnostic investor, PineBridge’s strategy starts with looking at the entire universe, and through in-depth, bottom-up research, the firm narrows down the opportunity set. “Our stock selection approach is focused on selecting companies that have unique competitive advantages, high quality of management, and reasonable valuations regardless of their weighting in the benchmark,” Soon says. “This fundamental-based, long-only investing style has held firm through various market cycles and crises.”

Like all investors, PineBridge was challenged severely in early 2020, when the pandemic emerged from out of nowhere and plunged world markets into a crash. But some aspects of managing money held true, says Soon, and reinforced the house’s view of investing.

“If I think of lessons that we’ll take away from 2020, first, every crisis is different, yet the same. People become fearful when markets fall and sell, but they become fearless during a bull market even when valuations don’t justify it. We think it should be the opposite.

“Second, this year has shown us that quality is paramount. When a sudden shock like COVID hits, companies that have strong business models, unique advantages, and good management are much better positioned to weather the downturn.

“Third, the beauty of volatility is opportunity, and there were plenty during the market sell-off. Active investors like us are well-positioned to accumulate high-quality companies whose prices have come down at more attractive levels. During the crisis, we focused on companies that we believed would survive and continue to grow market share over the long run, rather than those that could benefit from the crisis in the short term.”

With COVID starting to recede into the rear mirror, technological disruption and digitization remain key themes for the decade ahead – and that’s the evolving opportunity set within Asia that Soon and her team are targeting.

“We believe advances in technology such as automation and 5G will have cascading benefits across multiple sectors and companies. The Greater China technology ecosystem, for example, has rapidly grown over the years and is expected to continue to expand as China focuses on domestic self-reliance in high tech materials such as semiconductors. South Korea has been a leader in mobile technology.

“Meanwhile, the region’s young populations are fast adopters of new technology – we have long witnessed this across time through mobile use, the explosion of e-commerce, and the accelerating use of artificial intelligence in daily lives, particularly in China. Asia’s growing high-tech prowess intersecting with pent-up consumer demand in the most populous and fastest-growing region in the world is probably unprecedented in history and sets up tremendous possibilities,” she says.

PineBridge’s approach in assessing opportunities in technology remains the same as in any other sector: the firm looks for unique competitive advantages, quality of management, and valuations. “For example, one of our long-held companies is a global provider of language, data annotation, and technology solutions to enterprise and government clients, a niche industry which it enjoys market leadership,” says Soon.

One aspect of investment that is becoming increasingly important to investors is environmental, social and governance (ESG) considerations. With PineBridge being a signatory of the United Nations Principles for Responsible Investment (UNPRI), Soon says ESG analysis is “incorporated at every step” in the house’s investment process.

“We also work with companies to effect ESG change so they understand the value or potential impact on their share price of better governance or sustainability. This ‘consultivist’ approach with company management benefits greatly from years of relationship-building of our team across the region.

“Asian companies are increasingly integrating ESG into their business operations. In the cement industry for example, an Indian cement company that we have held in our portfolio for some time now is considered an industry leader in sustainability in its manufacturing process. This focus on sustainability ahead of its peers has translated into cost savings for the company, and greater shareholder value,” Soon says.

PineBridge is constantly looking to identify powerful investment themes, and Soon says there are several that are shaping its portfolios for the next five years, and beyond. “We have a shorthand for the themes that we believe will drive growth in the region over the long run – AEIOU. This refers to automation, environment and energy, information technology, OEMs (original equipment manufacturers), and urbanization. China, among others, is making great strides in industrial automation, which in turn improves the cost efficiency of manufacturing.

“Meanwhile, Asia remains important in the global supply chain, although manufacturing hubs may no longer be concentrated in China but more strategically located across the region. We see urbanization requiring infrastructure investments for new roads, airports, for example to move products across borders. As these themes unfold, they could bring about profound change in the global economic order. We believe agile and forward-looking smaller companies are well-positioned to capture and grow these opportunities into the future,” she says.

And given the PineBridge track record, it would be a brave person who bet against the team’s stock selections capturing the impact of these drivers.

James Dunn

James is an experienced senior journalist and host of The Inside Network's industry events.