hong kong<u+2014>in asia, active stock pickers are still on top. driving the trend is the abundance of little-covered companies and unusual price discrepancies in this region<u+2019>s developing markets, which fund managers say create greater chances for profits. investing in passive funds can also be riskier in asia<u+2019>s choppy markets because major stock indexes are heavily concentrated in big, state-run companies. among the largest stock funds investing in asia excluding japan, two-thirds have beaten their benchmark over the past three years, according to an analysis by morningstar inc. in contrast to outflows in the u.s. and europe, active funds based in asia took in a net $39.4 billion last year, according to morningstar estimates. passive funds gained an estimated $35.6 billion. <u+201c>people feel they are getting value for money for paying for active [management],<u+201d> said peter ryan-kane, who advises the portfolios of sovereign-wealth funds and other big investors in asia for consulting firm willis towers watson. the prevalence of massive state-run companies in asia, for example, means passive funds tracking an index here are often stocked with companies that <u+201c>aren<u+2019>t necessarily the best investment, just the biggest,<u+201d> mr. ryan-kane added. the issue is particularly clear in markets like hong kong, where the city<u+2019>s biggest exchange-traded fund tracks a blue-chip hang seng index that has more than a 50% weighting in financial and energy companies. many of them are state-run chinese banks that investors are loath to own as china deals with a rapid buildup of debt. the case is also prevalent in smaller emerging markets such as thailand, where state-run oil-and-gas producer ptt pcl accounts for a full 11% of a key thai stock benchmark. compare that to popular passive funds in the u.s. such as the spdr s&p 500 etf, where privately-run technology companies such as apple inc. and amazon.com inc. make up the biggest chunks of the fund. <u+201c>if you think about the way a benchmark evolves in a market like china: when you have a small business that<u+2019>s going well, and it grows and the market starts recognizing it, it<u+2019>s almost at the peak of its cycle that it gets included in the benchmark,<u+201d> said jing ning, who runs fidelity worldwide investment<u+2019>s $3.7 billion flagship china stock fund, in an interview. her fund is up 30% in the three years since august 2013, easily outpacing a 15% gain for her benchmark, the msci china index. so-called <u+201c>cross-border<u+201d> funds like ms. ning<u+2019>s china fund, which are domiciled in tax havens like luxembourg or dublin and sold primarily in europe, also continue to post inflows, according to morningstar. more than three-quarters of the largest stock funds investing in asia excluding japan are domiciled in luxembourg or dublin, according to the firm<u+2019>s records. to be sure, it<u+2019>s likely the edge of active investors in asia will be eroded over time as companies in the region continue to develop and more assume standards already long seen in the u.s. and europe. the investment industry in asia too remains in its infancy: active stock funds in asia oversaw $351.5 billion at the end of august, compared with $5.8 trillion by similar funds in the u.s. yet for now, investors may prefer to have a stock picker call the shots in asia<u+2019>s often opaque markets. last year, for instance, ms. ning refused to buy shares of highflying solar company hanergy thin film power group, even as she took pain on the stock<u+2019>s more than doubling of value in her fund<u+2019>s benchmark. just weeks after explaining to investors she <u+201c>lacked conviction in its prospects,<u+201d> the stock suddenly slid 47% in a single session before being frozen from trading. an uncomfortable moment for investment firms whose funds passively owned the company, it was a vindication for stock pickers like ms. ning who actively steer a fund into, out of<u+2014>and away from<u+2014>investments. <u+201c>i think in active management that<u+2019>s where the value comes from: you have people on the ground and you can make a decision at the peak or trough of the market,<u+201d> ms. ning said. write to mia lamar at mia.lamar@wsj.com
active investing trumps passive funds...in asia  - wsj
mia lamar