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Big potential in Asia’s small caps, says fund manager

SINGAPORE — Investors willing to put in the time and effort to research Asia’s small-cap stocks could see decent returns. Between the advent of the global financial crisis at the end of 2008 and October this year, Asian small caps have outperformed large caps by 55 per cent, according to the performance of MSCI indices.

SINGAPORE — Investors willing to put in the time and effort to research Asia’s small-cap stocks could see decent returns. Between the advent of the global financial crisis at the end of 2008 and October this year, Asian small caps have outperformed large caps by 55 per cent, according to the performance of MSCI indices.

And Mr Choo Jee Meng, Head of Equities at Fullerton Fund Management, a unit of Singapore’s Temasek Holdings, pointed out that there are plenty to choose from; he estimates that there are close to 1,700 companies in the regional small cap universe —defined as publicly-listed companies with a market capitalisation below US$3 billion (S$3.7 billion) — versus about 600 in the large cap universe in Asia ex-Japan.

But finding the right company to invest in can be a challenge, Mr Choo told TODAY. The stocks can be less transparent and less well-covered than their blue-chip counterparts — making them a potentially riskier prospect.

For Mr Choo, mitigating that risk requires forging a more intimate relationship with the management of potential investment targets.

“For small caps, you really have to meet the management face-to-face to understand their business model and what motivates them. It takes time to know the company well, but the benefits can be tremendous,” he said.

However, while fund managers have the opportunity to meet with company managers, individual retail investors would not have the same access.

As a result, they may need to think more creatively about investing in the small-cap universe, which is a tactic that Mr Choo has also employed: When he started hearing about more of his friends taking up yoga, he made a small mental note of the trend.

But when he realised that they also were buying some very expensive gear to wear to their classes, that seed quickly flourished into a full-blown investment idea.

“Many people leading healthy lifestyles, doing fitness activities such as yoga and cycling, were buying very high-end sportswear that were selling at very high prices,” said Mr Choo.

He added: “My question was how can we get exposure to that and we ended up investing in a stock that produces the specialised fabrics used to make this type of fitness wear for global companies.”

That hunch started an intense process of research, number-crunching and due diligence that eventually led to an investment in Taiwanese garment manufacturer Eclat Textile, which supplies to leading yoga and sportswear brand lululemon.

Another pick which highlights the growth potential of small-caps is Singapore-based oil and gas services player Ezion Holdings — one of Fullerton’s biggest holdings.

The company’s first half revenue for this year grew 80 per cent, while net profit surged 95 per cent year-on-year, driven by the company’s growing fleet of lift boats and service rigs, it reported in August.

Such investments have seen Fullerton’s Asia Small Cap fund deliver an over 10.5 per cent return year-to-date, versus an approximate 2.4 per cent rise in the MSCI Asia All-Cap Index.

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