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Asia shift catches a few by surprise

A shift towards the Asia Pacific region in the Adviser Fund Index in the May rebalancing surprised a number of panellists.

The rebalancing saw a 5 per cent switch into Asia Pacific assets, taking the total exposure to the region to 21 per cent of the portfolio.

This builds on a gradual trend that has seen an increase in Asia Pacific allocation in each AFI rebalancing since November 2009, when it accounted for only 13 per cent of the index.

Chartwell Investment Management head of fund research and AFI panellist James Davies says he is particularly surprised by the recent moves.

He says: “It is the opposite of what we have been doing. Over the last year we have been moving our portfolio away from emerging markets and towards developed markets. We think large developed market companies offer better protection in case of another market setback and are a safer bet for the moment.”

While the move is a sizeable one, it does not appear to reflect a broader move away from developed markets to the developing world.

Indeed, UK, US and European equity exposure all saw an increase this month, suggesting the shifts represent a move out of more generalised products and into region or country-specific funds.

What is interesting is that despite concerns surrounding inflation and the threat of monetary policy tightening, particularly in China, panellists could be seen to be taking a longer-term view.

But other panellists are sceptical, inc-luding Ashcourt Rowan head of research Tim Cockerill, who says, if anything, the move to Asia Pacific indicates a value play rather than a long-term asset allocation decision.

He says: “The valuation argument is probably the strongest. The price peak for a number of Asia-Pacific funds was back in 2007, whereas the global emerging markets funds are already past their 2007 levels.”

This would imply a shorter-term shift that might well be exhausted if Asia Pacific markets rally to around their historic highs.

The problem with this scenario is that if in fact we are going through a structural change in global financial markets, then 2007 stockmarket levels may not be a relevant benchmark.

If stagnation in developed markets turns out to be a longer-term malaise, as in the Japanese example, then past valuations will fail to reflect the underlying growth of emerging economies and the likely international capital flows chasing them.

History suggests analysts and investors alike will likely be late to react to the trend but what is without doubt is that these markets are playing a far larger role in the thinking of UK investors than they have in the past.

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