The Believers

INVESCO joins the rush to offer funds based on sector themes, not geography. But where will this leave Asia?

INVESCO is doing the rounds in Asia promoting new sector funds, including ones dedicated to financial services and energy and natural resources, as well as a global growth fund that has been restructured as a multi-sector vehicle. Singapore-based Andrew Callender, investment director of global products, says the funds will launch on 19 February.

Sector themes are not new, but Callender outlines a vision of how they could usurp traditional geography-based funds as core holdings, not just for retail investors, which have to date been enthusiastic customers, but also for institutional clients. It boils down to what degree investors buy into ‘globalization’ and other meaty concepts.

Callender explains that if you believe a series of key trends will continue to dominate the world for the next five to 10 years, then sector investing will pay off more handsomely than following the MSCI World Index. These trends are woolly but familiar: globalization, demographics, technological innovation. If you accept these are what makes the world go round, then you can create some guidelines based on them, such as a worldwide web of information, disinflation and the lack of pricing power among nearly all companies.

There are a handful of sectors that are driven by these forces – Callender says they are tech, telecoms, healthcare, financial services, leisure and energy and natural resources – and by clever stock-picking within those universes, you can outperform a traditional allocation based on geography.

“We pick the leading companies in the fastest-growing businesses,” he says. “I know it sounds obvious but that’s what we do.”

There are reasons to believe that replacing your traditional allocation with a sectoral one is risky. Callender’s own data supporting these trends only goes back to 1998, so you have to ask yourself whether these trends are sustainable or a short-term blip. But if globalization, et cetera, steamrolls ahead, if it is not reversed by anti-WTO protesters in Seattle, or capital controls in Malaysia, or French farmers vandalizing McDonalds restaurants, then Callender argues that a smart sector-based approach will capture growth better.

“Institutional clients are not building core investments along sector lines yet,” Callender says. “That’s more acceptable among retail investors. For institutional clients, single-sector themes get more attention.” The main problem for multi-theme funds is the lack of a benchmark. Clients can easily point to an MSCI or FTSE country-based allocation, but nothing really exists yet for themes. Once that develops, however, he expects sector allocations will become increasingly popular.

If so, where does that leave Asia? If more investors switch from thinking about geography to sectors, will that mean a net inflow or outflow to Asian listed companies?

Callender answers the question in several ways. On the one hand, aside from telecoms, American or European companies dominate the other five sectors. When asked, for example, what he looks at in Hong Kong, Callender says very little. How many Hong Kong companies really fit into a global sector story? Maybe HSBC and Hutchison Whampoa. Even China Mobile is only half there – when compared to the likes of Vodafone, its growth prospects are based on domestic, not global, factors.

He does say that at present, his Asian allocation is unusually high. He bought names such as TSMC and Samsung Electronics when they were cheap. And there are stories across Asia, such as Indian software, which fit neatly into sector funds.

But looking at the broad sweep of Asian stocks – property, retail, chemicals, steel – there is a lot that sector funds will ignore. And taking those companies that are in the right sectors, how many of those companies are globally competitive? How many Asian TMT or banking or resource stocks will appeal when compared to Oracle, Citigroup and Enron? Callender and INVESCO – along with most of their competitors – may indeed be promoting a better product for clients, and Asian companies interested in overseas capital would do well to ask themselves whether or not they fit the bill.

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