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Don’t be an index-driven investor, urges JPM’s Forey
by Robert St George on Oct 07, 2013 at 14:18
‘It seems axiomatic to me that the benchmark should not be the place to start,’ Forey (pictured) said. ‘The index shows how the world was yesterday and if one looks at the index as it was constituted 10 years ago, it was clearly not a good guide to the best investments over the ensuing decade; the same will be true for the next decade.’
Most obviously, Forey observed, index dependence can lead investors to overlook the opportunities available from smaller companies. As an example, he cited a provider of credit in Eastern Europe, a further benchmark anomaly in that it is listed in London.
‘International Personal Finance, first purchased in the depths of the financial crisis early in 2009, was one of the smallest companies by value that I have bought in the last few years,’ Forey explained. Since that year, however, its share price has surged by 300%.
The manager also highlighted fast-food chain Cafe de Coral and Convenience Retail Asia, both based in Hong Kong, as star performers that would have been neglected by those focusing solely on indices. They have appreciated by 90% and 157% respectively over the past five years.
‘The important point is that they were not originally important benchmark constituents, even if they subsequently became such,’ said Forey.
However, Forey equally argued against eschewing large cap indices altogether in favour of smaller companies.
Size, he noted, sometimes conferred benefits. ‘In some industries, scale is a major determinant of competitive advantage and so big companies can also give the best returns,’ remarked Forey.
He pointed to Taiwan Semiconductor as a typical giant whose business ‘is not easily replicated, as various unsuccessful attempts to do so indicate’.
Forey added that mega-caps need not necessarily be incapable of growth. ‘AIA is one of the biggest insurance companies in Asia, with strong market positions in many countries, but it operates in an industry that still has enormous long-term potential for growth,’ he contended. In health insurance alone Forey estimated the potential Asian market would be worth more than £60 billion through the remainder of the decade.
Over the past 10 years the trust has returned 342% compared with a 223% rise by its benchmark MSCI Emerging Markets index.
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by Alex Steger on Dec 11, 2013 at 10:19