Source: Citi Research, CEA, Various Government Reports, as of 13 April 2018.
For illustrative purposes only, we are not soliciting or recommending any action based on this material.
Japan is back on investors’ radar — according to our PineBridge economists, the economy is on solid footing, employment is at its highest level since the 1990s, profits have improved and corporate Japan is making strides in overhauling its governance practices. This sets the stage for an earnings-led, long-term equity market expansion. However, investors have barely scratched the surface of the Japanese equity universe, mostly investing in well-known, large cap stocks.
PineBridge Investments is a private, global asset manager focused on active, high-conviction investing. We draw on the collective power of our experts in each discipline, market, and region of the world through an open culture of collaboration designed to identify the best ideas. Our mission is to exceed clients’ expectations on every level, every day. As of 30 June 2018, the firm managed US$87 billion across global asset classes for sophisticated investors around the world.
PineBridge is majority-owned by a subsidiary of Pacific Century Group (PCG), an Asia-based private investment group. PineBridge employees have a meaningful share in the success of the firm through equity ownership and other rights to profits of the business. Asset management is our only line of business, ensuring that our interests are fully aligned with those of our clients.
Asia-based companies are creating unique positions as significant parts of globalized innovative manufacturing and R&D
JAPAN SMALL CAP
Source: United Nations. Data as of 2009; Census of India, various years. For illustrative purposes only. Any views are the opinion of the manager and subject to change. We are not recommending or soliciting any action based on this material. Low, medium and high refer to fertility rate scenarios.
For these reasons, the developing nature of Asia makes the case for selecting a manager who has local insight, on-the-ground presence and a time-tested track record in navigating multiple risks.
Managed by an established investment team in Japan, our Japan Small Cap Strategy follows a systematic bottom-up approach to uncover hidden gems. This approach uses a consistent and disciplined research framework focused on growth and value styles across sectors, investing in high quality businesses that are typically non-consensus. The result is a highly concentrated portfolio of 50-70 rigorously researched stocks that we hold for the long term. In contrast, the MSCI Japan Small Cap Index represents 926 constituents.
A large part of our portfolio is in stable and cyclical growth companies with improving fundamentals and attractive valuation. The Strategy has invested in companies engaged in cutting edge biotech, those that developed next generation technologies to modernize traditional sectors, as well as those on the forefront of industry reforms and changing consumer behaviour, among others. As bottom-up investors, we don’t follow the herd. For our investors, that could mean less volatility in their portfolios and more stable returns over the long term.
Thanks to Abenomics, Japanese economic growth is no longer driven by the cyclical recovery of domestic and global markets but by the underlying structural changes of Japanese companies to become more profitable, capital efficient and growth focused. These structural changes should provide a strong tailwind for Japanese earnings in the coming years. For investors looking to take advantage of the alpha opportunity of a revitalized Japan with modest risk, an active small caps strategy offers a long runway for growth.
“The world is flatter than ever. It is all about what the company does, not where it is based. We like companies that execute well, have a big share in developed markets, and have high barriers to entry.”
Companies that will dominate the global market as the next Alibaba or Tencent will start out small. Over 90% of listed companies – or about 15,000 – in Asia ex Japan are small to midsize. Most are under-researched by analysts, providing plenty of opportunity to discover stock mispricings.
The region’s small cap market also reflects opportunities that play on the long-term drivers of Asia’s growth, such as demographics, urbanization, sustainability, and productivity. An aging population coupled with wage pressures in China, for example, is expected to give way to increased automation, including the use of industrial robots and virtual and augmented reality (VR/AR) technology to boost overall productivity and efficiency. Asia is seen as a major player in the development of VR/AR technologies and automated solutions for various applications. Meanwhile, younger populations and rising incomes in India and Southeast Asia are expected to fuel growing demand for goods and services. Greater mobility and rapid urbanization will translate to greater connectivity and public infrastructure investments.
Here, we spotlight three award-winning Asia strategies where the
power of PineBridge’s process and people have driven long-term outperformance in a region full of opportunity.
CAPITAL AT RISK: All investments involve risk. The value of your investment and the income from it will fluctuate and a loss of capital may occur.
Source: Quick for historical data, IFIS for forecasts as of 29 June 2018. Only companies with full set of data for each period and companies with accounting periods ending in March that were constituents of MSCI Japan Small Cap Index as of 29 June 2018 are used in the calculation. Financials excludes banks. Any opinions, projection, forecasts and forward-looking statements presented above are valid only as of the date indicated and are subject to change. For illustrative purposes only, we are not soliciting or recommending any action based on this material.
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Investors in India tend to find comfort in the index, assuming that where India’s GDP growth goes, so goes the index. That hasn’t always been the case, partly because of the structure of the Indian economy, where there’s a large informal sector and many unlisted enterprises. In other words, the index can be a poor proxy for overall economic activity.
We believe that a better way to capture growth opportunities in India is by methodically constructing a portfolio without regard to the index. From a universe of more than 5,000 listed companies, our India Equity Strategy builds a portfolio of only 30-40 stocks. Each stock in the portfolio passes through rigorous research and analysis focused on three fundamental areas: the strength of the company’s business model, the quality of management, and valuation. That is, we find strong businesses that are resilient through the economic cycle; we ensure it has a capable management team that can be trusted with capital, and finally, we invest if the price is justifiable. This time-tested stock selection process is designed to mitigate permanent loss of capital for our investors.
A deep understanding of a company is key. Last year alone, our on-the-ground team traveled 80,000 kilometers across India to research and visit companies, and meet management. The team tracks over 20 proprietary databases and leverage a variety of sources as well as the insights of the global PineBridge investment team.
A Big Universe of Innovation and Growth
The PineBridge Approach
Source: Bloomberg, data as of 02 July 2018. MSCI Japan Small Cap Net Total Return USD Index and MSCI Japan Net Total Return USD Index are indexed at 100 as of 21 August 2007.
With a large universe to start with, the key to our approach in investing is knowing how much a company is truly worth. Matching that value with the right price in the market is where the opportunity lies. Instead of relying on what’s trending, we go back to basics — deep research and analysis of a company’s past performance and its ability to continue to deliver in the future.
From a universe of over 15,000 stocks, we identify the opportunity set and apply our proprietary bottom-up research process to create the portfolio. Unlike other managers, we do not position our portfolio to be purely value or growth, but prefer to look where companies are in their cycle.
Our analysis also extends to the story behind the numbers: How good is the management? What is their long-term vision? Are they able to execute it? That’s why company face-to-face meetings with management are as important in our stock selection process as examining the company’s books.
Asia ex Japan Small Cap
JAPAN SMALL CAP
Uncovering Exceptional Opportunities
Source: World Bank (historical), PineBridge Investments (forecasts), as of 31 December 2017, underlying data as of 31 December 2016. GDP reflects nominal figures. East Asia & Pacific countries include Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Thailand, and Vietnam. Asia ex-Japan includes all East Asia & Pacific countries including India but excluding Japan. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Any opinions, projections, forecasts, or forward-looking statements represent the view of the manager, are valid only as of the date of this presentation, and are subject to change.
in Asia are abundant
& MIDDLE EAST
SOURCE: Lipper, as at 30 June 2018. Performance is based on total return in JPY calculated gross of tax, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date. PineBridge Investments relates to Midori Katsumi’s track-record in the sector. Past performance is not indicative of future results. For further information, please see www.pinebridge.com/funds. Benchmarks are used for illustrative purposes only, and any such references should not be understood to mean there would necessarily be a correlation between investment returns of any investment and any benchmark. An investor generally cannot invest in a benchmark. A universe for comparison was not available so a market benchmark has been used.
Asia ex Japan Small Cap
If India continues to grow as fast as it has in the last two decades, the India of 2028 and 2038 would be vastly different from today as a number of megatrends shape its future. India’s demographic trend points to a 60% increase in the working population by 2050. Investments in infrastructure are accelerating, helping boost industrial growth. Urbanization is also keeping pace — approximately 30 people are moving to cities from rural areas every minute. Meanwhile, the growing competitiveness of high value exports such as pharmaceuticals and high engineering goods (on top of its strong technology services exports) reflects India’s global economic clout.
Asia, the world’s most populous region with over 4.5 billion people , is fast-paced, dynamic and highly idiosyncratic – presenting fertile ground for harvesting alpha.
More than 80% of listed companies in Japan (around 3,000) are in the small cap space. These companies occupy a sweet spot for alpha – they tend to be under-researched, with too little or no coverage, and thus provide opportunities for compelling returns.
Consider two important facts about Japanese small caps shown in the charts below:
• They have outperformed the broader market most of the time over the past 10 years
• They have been less volatile than large caps over the same period
Our high conviction approach results in a portfolio that’s starkly different by sector breakdown from one that replicates the benchmark (MSCI India Daily Total Return Net Index), yet is diversified.
We have found opportunities across the market spectrum — fast-growing companies that hone their digital, technological and intellectual property advantages to expand market share, companies that stand to benefit from structural drivers such as consumption and infrastructure, as well as those making a turnaround.
India’s transformation is likely to be accompanied by disruptions, in the form of newer business models, new regulations, and other changes. This calls for a smart playbook — investors need to look for companies able to navigate through various cycles to maximize the opportunity, while minimizing risk. The 13-year track record of our India Equity Strategy shows that the market is rich in alpha — for those who know what to look for and how to look for them.
Uncovering Exceptional Opportunities in the World’s Fastest-Growing Region
About PineBridge Investments
Learn more about PineBridge’s offering in the Japan small cap asset class
ALPHA IN ASIA
Uncovering growth potential at the right price
Our approach to the Asia ex Japan small cap asset class seeks to invest in forward-looking companies with strong management and sustainable business models that will allow them to survive and thrive in the future. We specifically look for companies that possess strong financials, high technological barriers to entry (e.g., proprietary research and development), cost advantages, resilience to industry consolidation, and solid brands.
In our portfolio of 40-70 stocks, we are seeing these opportunities manifest across a number of markets and sectors: high-value-adding original equipment manufacturers (OEMs) and their suppliers that are heavily investing in research and development; infrastructure and construction-related companies in line to benefit from the US$1.5 trillion in average annual infrastructure investment needs in Asia⁴; retailers and their suppliers; and many others.
AUM as of 30 June 2018 and includes US$13.3 billion of assets managed by joint ventures or other entities that are not wholly owned by PineBridge Investments.
Multi-Asset includes US$9.1 billion allocated opportunistically by the Multi-Asset team to PineBridge equity, fixed income and alternative strategies.
Due to rounding totals are approximate.
Our rigorous due diligence process in stock selection, honed through multiple market cycles, acts as a built-in risk management system that helps ensure our portfolio is more resilient over our investment horizon and can deliver sustainable, long-term returns. As long-term investors, we view episodic volatility not with anxiety, but as an opportunity to increase our positions or spot a potential addition.
Our approach may result in a portfolio made up of less “glamorous” stocks — and that sets us apart from many of our peers. Ours is a portfolio designed to deliver sustainable, long-term earnings.
Source: Bloomberg, data as of 29 June 2018. Diversification does not ensure against market loss. Benchmarks are used for illustrative purposes only, and any such references should not be understood to mean there would necessarily be a correlation between investment returns of any investment and any benchmark. An investor generally cannot invest in a benchmark. Any opinions, projection, forecasts and forward-looking statements presented above are valid only as of the date indicated and are subject to change. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
Exceptional opportunities are those rare occasions when one sees value where others don’t. At PineBridge Investments, we are in the business of finding them – before the market realizes their worth. Our high-conviction, active approach combined with a mind for managing risk bridges boundless potential with enduring investing values.
Our investment philosophy is built on three pillars reflecting our core beliefs that a time-tested process can capture returns, investing insight comes from a mixture of local and global expertise, and longer holding periods mean better risk management and higher alpha potential.
Opportunities across the market spectrum
Capturing future opportunities today
The charts also show that an allocation to Japanese small caps can add diversification with very little to no additional risk under normal market condition, providing a better overall risk-return profile.
Our Japan Small Cap Strategy helps investors capture high quality companies that are on their way up — companies with strong fundamentals that are mispriced by the market. Given the size of the small cap market in Japan, investors can find companies on the cusp of emerging and future global or local trends (automation, the Internet of Things, augmented or virtual reality, etc.), as well as transformative Japanese reforms — the steady march toward better corporate governance, workforce diversity, and environmental stewardship. These companies often operate in niche markets, giving them high barriers to entry and a competitive advantage, both of which support higher returns over the long run.
The Sweet Spot for Alpha
OPPORTUNITIES LIE WHERE PEOPLE LIVE.
Asia ex Japan Small Cap
Independent since 2010, our roots developed as the former asset management arm of AIG with decades of investment experience and history managing developed and emerging markets portfolios, as well as traditional and alternative asset classes.
Today, our clients include pension plans, insurance companies, official institutions, private banks, advisors and intermediaries, supported by offices and staff in 20 locations. Our footprint enables us to deliver the firm’s full capabilities to investors at a local level, working closely to understand investor objectives, meet their needs, and help to solve their challenges.
High quality companies on their way up
In today’s environment of rapid innovation and intense competition, forward thinkers win the day. The small cap universe has been a rich hunting ground for future winners – companies that are more nimble than their larger peers, have room to grow into large caps, or have the potential to disrupt their competitors.
The challenge for investors looking for the next unicorn or disruptor lies in ascertaining a company’s true potential and worth, which requires skill and discipline. We believe our active strategy for the Asia ex Japan small cap asset class invests with clarity — using a fundamental, bottom-up approach to pick companies that have their eyes on the future and the means to deliver sustainable, long-term earnings.
SOURCE: Citywire Discovery/Lipper, as at 30 June 2018. Performance is based on total return in INR calculated gross of tax, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date. Average manager is the based upon the managers tracked globally in Citywire's Equity - India peer group. PineBridge Investments relates to Elizabeth Soon’s track-record in the sector. Past performance is not indicative of future results. For further information, please see www.pinebridge.com/funds.
Active management can capture significant upswings from structural changes in the region while mitigating risks from periods of increased volatility. We have high conviction in Asia’s longer-term attractiveness despite recent headlines suggesting increasing political risk. These political developments, including US-driven trade protectionism, tensions with North Korea and further Chinese reforms, are worth monitoring for their potential implications for financial assets.
Learn more about PineBridge’s offering in the India equity asset class
Asia ex Japan Small Cap
A smarter alternative to index investing
SOURCE: Citywire Discovery/Lipper, as at 30 June 2018. Performance is based on total return in USD calculated gross of tax, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date. Average manager is the based upon the managers tracked globally in Citywire's Equity - Asia Pacific Small & Medium Companies peer group. PineBridge Investments relates to Elizabeth Soon’s track-record in the sector. Past performance is not indicative of future results. For further information, please see www.pinebridge.com/funds.
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SELECTIVITY IS KEY
JAPAN SMALL CAP
While India’s long-term economic outlook appears bright given the factors listed above, investors can’t underestimate its idiosyncrasies, which can affect the prospects of individual companies. For instance, as one of the world’s largest energy users and a net oil importer, India is prone to the risk of a twin deficit (fiscal and current account deficit) from higher oil prices. While the country has favorable demographics, skilled workers are in short supply and wage inflation is high. While the government is putting more money on infrastructure, existing transport and energy systems are still largely insufficient to cope with current demand. In addition, land is in high demand and can be difficult to acquire.
Given this contrast, we believe vigilance and patience will be essential to creating wealth from investing in India. That’s why our approach is to carefully select companies that can see opportunities in the shifting landscape and navigate their way through India’s transformation.
A Delicate Balance between Return and Risk
Not following the herd
Learn more about PineBridge’s offering in the Asia ex Japan small cap asset class
Asia ex Japan Small Cap
Anik Sen, Global Head of Equities, PineBridge Investments
JAPAN SMALL CAP
Asia ex Japan Small Cap
JAPAN SMALL CAP
JAPAN SMALL CAP
speak for themselves