HEAD-TO-HEAD: Invesco vs iShares

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Pictured: Luke Ng, senior vice president of research at FE Advisory Asia

Rarely does one see a stock market dominated by one company as Korea’s market is by Samsung Electronics. At the end of June 2017, the electronics giant’s common shares constituted 27.9% of the MSCI Korea Index, and its preferred shares a further 3.95%. The second largest Korean company by market capitalisation was semiconductor maker SK Hynix, which contributed only 4.7% of the index.

“In Korea, investors are seeing an earnings revision to the upside at the moment, affecting cyclical stocks” said Luke Ng, senior vice president of research at FE Advisory Asia. Samsung Electronics and other export-oriented companies such as SK Hynix and car maker Hyundai have seen their share prices rise with earnings, as the economic cycle is propelled by increasing global demand.

Such an environment makes life difficult for active fund managers. Samsung’s nearly 30% weighting lifts stock indices and passive funds that track them, and the company’s stock was up around 40% last year. Active managers in the meantime are routinely restricted to no more than 10% of their fund’s holdings in one stock. They must, by design, allocate investment to other companies, which in Korea’s case cannot measure up to Samsung’s rise.

No wonder that among Korean equity funds available for sale in Hong Kong, the top performers as of 20 July, on a one-, three-, and five-year basis, were four ETFs: iShares MSCI Korea Ucits ETF, SAM Value Korea ETF, DB x-trackers MSCI Korea Ucits ETF and Mirae Asset Horizon KOSPI 200 ETF. The best performing active fund was the JP Morgan Korea Equity Fund. It lagged the worst-performing ETF by 2-3% in the three time periods.

“The key reason for that is that Samsung’s price grew more than 40% last year,” said Ng. “If Samsung outperforms the market as the whole, it is really hard for an active fund to beat an ETF.”

This type of market environment is even more detrimental for fund managers who follow a core quality approach − staying away from cyclical companies but looking for those with long-term sustainable and predictable earnings growth. Such companies tend to underperform when the cyclicals rally, and fund managers who stick to their conviction suffer.

FSA compares one such fund, the Invesco Korean Equity Fund, currently the bottom performer in the sector on a one-year basis, to the largest Korean equity ETF by AUM, the iShares MSCI Korea Ucits ETF.

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