Asian small companies, despite being frequently overlooked, are a significant driver of the global economy, according to Gabriel Sacks, manager of the Aberdeen Asia Focus fund. Sacks highlighted that Asia is the largest economic region globally, contributing over 50% of worldwide growth.
The market for Asian small caps is dynamic, with a rapidly changing landscape. This presents a challenge due to the limited research available, which Sacks attributes partly to the fast pace of change and a focus on large caps by research due to factors like MiFID and passive investing.
While the broader Asian small caps market is diverse, artificial intelligence (AI) is a current focus. Historically, the Aberdeen Asia Focus fund had a heavier weighting towards India, but the AI boom has shifted this towards export-oriented Taiwan and Korean markets, particularly in the semiconductor supply chain.
Sacks noted that the market has rewarded firms in these sectors, leading to an increase in index and portfolio weights. The fund has been taking profits from its AI winners for at least the last six months, yet the weight has continued to rise. High barriers to entry in the supply chain have boosted the performance of firms like TSMC and Samsung Hynix, as they profit from the AI boom by developing chips, cooling, testing, and services.
The fund is also exploring second and third-order derivative plays on AI, which are emerging businesses that are highly leveraged to the AI-driven market. Sacks indicated that many of these names have performed better than large cap firms like TSMC, demonstrating that AI and tech exposure can be achieved through diversified small cap portfolios.