Fund manager David Jane considers the question of whether regional asset allocation works using three examples.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
We sometimes get asked about regional asset allocation, perhaps because this is what most mixed asset strategies do.
In the days of fund of funds, asset allocation between asset classes and regions was the typical strategy, while attempting to add value with fund selection. Most directly invested funds relied on specialist regional and asset class teams with a strategist sitting at the top making the asset allocation calls. This approach has carried through to the era of model portfolios.
We have always been fundamentally different; one team runs the whole fund.
We start from an overall macro regime viewpoint. At present this is our higher for longer view. This guides our approach to asset allocation and risk, particularly how we diversify equity risk.
After this we have a set of shorter macro understandings – such as cycles within this overall trend. This might guide shorter allocations within bonds and equities.
Next, we consider our equity themes. These tend to be longer term, although allocations to them vary depending on the macro environment and, most importantly, momentum factors.
Our selection criteria within these themes are driven by whether there is a divergence between the market narrative and fundamental factors. If so, we always look for momentum to be emerging to support our view.
Regional allocation does not really figure in our approach, it tends to be an output of the macro and thematic views. In our view, when investors are making regional asset allocation decisions, they are making sector and thematic decisions by default.
Consider, for example, the outperformance of the US in recent years. This can easily be explained by the performance of the large-cap technology theme. Similar companies listed in Europe and Japan have also done very well, but they comprise less of their relevant indices.
As a result, we are often able to pick up on successful themes within markets where the asset class itself may not be doing well.
A few recent examples are our US reshoring theme, our India value basket, and our Korean restructuring theme.
The US reshoring theme
We have held a basket of US mid-sized companies since 2022.
We took the view that many companies would be able to benefit from the trend to move production away for China and back to the USA.
We screened for businesses with a material number of sales in the US in industrial and related areas, at attractive valuations with positive momentum and came up with our basket of stocks.
Despite the underperformance of mid-caps in the US and elsewhere, this basket has been one of the better performing parts of the portfolio subsequently.
The Indian value basket
Demographics drives many of our themes, hence the growing workforce in India, particularly compared with other emerging markets, provides an attractive opportunity.
Again, we screened for valuation, momentum and liquidity and constructed a basket of attractive India stocks.
Continual monitoring has meant various stocks have been added and removed over time.
Despite the Indian Index marginally underperforming, this basket has also contributed nicely, due to our process of continually refreshing the holdings on momentum grounds.
The Korean restructuring theme
A final example is our recent position in another emerging market – Korea.
The Korean market is dominated by a few large technology stocks, such as Samsung and SK Hynix.
We noticed that the Korean government was becoming concerned over the low valuation of its stock market outside of these companies, and our screens showed some extreme mispricing.
A few announcements from the government led to these stocks starting to recover and we became involved.
Again, despite the poor performance of the local market in aggregate, our holdings have done very well this year.
Performance
See below how our Korean and our Indian equity baskets have been doing well despite lackluster local market performance.
India basket performance
![](https://www.premiermiton.com/wp-content/uploads/2024/06/India-chart.png)
Source: Bloomberg Finance L.P: 06/06/2023 – 05/06/2024. Normalised as of 06/06/23.
Past performance is not a guide to future returns.
Korea basket performance
![](https://www.premiermiton.com/wp-content/uploads/2024/06/Korea-chart.png)
Source: Bloomberg Finance L.P: 28/12/2023 – 05/06/2024. Normalised as of 12/28/23.
Past performance is not a guide to future returns.