Noble met with retail, private and institutional clients. To date, sector investing has been a retail phenomenon. But she found Asian institutions have accepted the philosophy behind sector themes. Their questions, she says, no longer concern the nature of sector investment, rather they are keen to know the practical side of implementing a sector-based strategy.
Our clients work on region-based benchmarks, such as the United States versus Japan versus Europe, she says. But the conversation is beginning to move to themes such as global telecoms. Clients are asking about things such as global semiconductor cycles. They have given a lot of thought to reconfiguring their allocation.
Their concerns centre on what benchmarks to use and how to manage risk. Despite this interest, institutions are not yet prepared to invest in sector funds. Its the battle of the benchmarks, Noble says. Pension funds are so reliant on peer grouping, they are unwilling to go out on a limb without an industry-recognized benchmark. Both MSCI and FTSE are trying to develop sector indices in a way that makes them as user-friendly and recognized as their country indices. Noble says MSCI, once it implements its move toward free-float adjustments, is probably ahead in this game.
The problem of a lack of benchmarks and peer pressure is not unique to Asia. Noble notes GSAM does not have any institutional clients who have taken the plunge into adopting a sector-based allocation.
Noble argues a shift to sector, not geographic, allocation offers both challenges and benefits for Asia-based companies. She notes that the bulk of global plays in technology, energy, consumer goods, financial services and healthcare the five sectors for which GSAM offers funds are located in the United States or Europe. But there are many Asian companies involved in these businesses that can compete globally. She believes investors seeking an industrys best of breed will be happy to overweight a market such as India or Taiwan, or even Indonesia, versus a country-based benchmark if local companies offer top growth potential in a particular sector. In addition, sector investment need make no distinction between large and small cap stocks, which can also benefit some Asian companies. Asian companies can get a fairer hearing, she says.