Emerging markets aren’t as risky and under-researched as they used to be, but James Thom, manager of the abrdn Asia Dragon Trust, still thinks investors “can lose their shirt entirely in the region” if they’re not careful.
Higher growth than in developed countries and the opportunity to diversify across countries, sectors and stocks, have attracted investors to the region and motivated managers and analysts to engage with it, making it the much more popular asset class that it is today.
But investors who want to keep their shirt should listen to Thom’s wake-up call and avoid being too greedy for returns from this side of the world, especially if they aren’t being selective enough with the opportunities available.
“Sadly, it's still possible to lose your shirt entirely in Asia, as it was made clear with the scandals that we saw last year,” said the manager, alluding to Singapore’s money laundering scandal of August 2023.
“You have to be very selective still. That's why the first question we need to ask ourselves when investing in Asian companies is: Who is the dominant shareholder and fundamentally, do we trust them? If the answer is no then you must walk away.”
This falls under governance, which, alongside political, economic and currency risks, has always been front and foremost for investors in emerging markets. This is why environmental, sustainability and governance (ESG) principles have always been “a genuinely integrated part” of the abrdn Asia Dragon Trust’s approach.
“We've been running money in Asia for decades and corporate governance has always been the absolute foundation of our strategy”, said the manager. “We want to see attractive industry dynamics, a strong vision for the company and cash generation, but we also spend more time than most looking at the downside risk as well.”
Unfortunately, this didn’t stop the trust from losing 23.8% last year, 10 percentage points below its average peer. Its performance doesn’t look better on the longer term, with the vehicle ranking fifth in the five-strong IT Asia Pacific sector over 10, five and three years.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
But despite the pitfalls, things are improving in emerging markets – at least around corporate governance and sustainability.
Thom saw “a growing recognition of the importance of governance and ESG” from Asian companies, making him more hopeful for the future.
“The smarter Asian companies are waking up to these themes. Typically, it's been us going to companies and saying to managers they needed to improve the conversation around ESG. Many times it's been a one-way street,” said Thom.
“But last year for the first time, we had an Indian company coming to us and saying: We're taking ESG very seriously and we value your feedback and input. It’s a positive sign, showing that the situation is a work in progress, but definitely improving.”