AIA: East Asian Emerging Market Fund With High Return Over Long Run

~ by Snehasish Chaudhuri, MBA (Finance)

iShares Asia 50 ETF (NASDAQ:AIA) is an exchange traded fund that tracks the performance of the S&P Asia 50 Index, by using representative sampling techniques. This index tracks the investment results of 50 of the largest Asian equities and invests primarily in equity markets of China, Taiwan, South Korea, and Hong Kong. Among the emerging economies that are expected to deliver high growth, and have high sovereign bond ratings, these four nations top the list. So, AIA’s investments are most likely to deliver consistent growth at a significantly low degree of risk. The fund pays a yield of a little over 2 percent and registered a price growth in excess of 17 percent during the past 3 months. This year, AIA probably will benefit from the economic growth of those East Asian emerging economies together with overall global economic recovery.

AIA Invests in ICT, E-commerce and Financial Stocks in East Asian Markets

iShares Asia 50 ETF was launched by BlackRock, Inc. (BLK) on November 13, 2007, and is managed by BlackRock Fund Advisors. Currently, it has an asset under management (‘AUM’) of $1.43 billion, which AIA invests in some of Asia’s large-cap equity stocks. Although the fund is named as an Asia fund, it primarily invests only in East Asian markets – China (42 percent), Taiwan (21 percent), South Korea (20 percent), and Hong Kong (11 percent). More than 90 percent of its assets are invested in stocks from 3 sectors – Information and communication technology (ICT), consumer cyclical (mostly e-commerce businesses) and financials. However, that’s not surprising, provided that all these countries boast of ample ICT, e-commerce, and financial companies.

60 percent of AIA’s assets are invested only in 9 stocks – Tencent Holdings Limited (OTCPK:TCEHY), Taiwan Semiconductor Manufacturing Company Limited (TSM), Samsung Electronics Co., Ltd. (OTCPK:SSNLF), Alibaba Group Holding Limited (BABA), AIA Group Limited (OTCPK:AAGIY), Meituan (OTCPK:MPNGY), JD.com, Inc. (JD), China Construction Bank Corporation (OTCPK:CICHY), and Hong Kong Exchanges and Clearing Limited (OTCPK:HKXCY). Samsung Electronics is a South Korea based global brand in the field of consumer electronics, information technology, and mobile communications. Taiwan based TSM is the market leader in semiconductor. BABA, JD, and MPNGY are Chinese e-commerce platforms. TCEHY is a well-known Chinese communication service provider. CICHY is one of the largest banks of China. AAGIY is a notable insurance firm and HKXCY is a renowned operator of stock exchanges and futures exchanges, based in Hong Kong.

Asia 50 ETF’s Returns are Highly Dependent on its Top Holdings of 9 Stocks

Unfortunately, top holdings of iShares Asia 50 ETF failed to generate positive price growth during the past one year. Only AAGIY generated a price growth of 12.45 percent. It is not surprising, since the broader market also performed poorly. However, the good news is all these stocks generated positive price growth over the past 3 months. Based on that, AIA also was able to register a price growth in excess of 17 percent. Going by the recent trends, investors surely have a reason to find interest in this fund. The fund has an expense ratio of 0.5 percent and is trading almost at par with its net asset value (‘NAV’).

2020 was a strong year for AIA as a sharp recovery in the Chinese economy resulted in significant gains in the stock market. Chinese retail investors also went for a higher volume of internet trading as compared to the previous years. In addition to that, the South Korean economy also witnessed a retail trading boom. No wonder, in 2020, the iShares Asia 50 ETF generated a total return of almost 34 percent. The past two years were pretty bad for this fund, as these economies suffered due to supply-chain disruptions and the inflationary pressures. Not to mention that the Russian invasion of Ukraine had further intensified the supply-chain crisis. However, despite such poor returns, the average annual returns between 2016 and 2022 stayed higher than 9 percent.

Risks Associated with Emerging Markets of China, Taiwan, and Hong Kong

The Chinese economy is projected to grow by 4.6 percent in 2023 and 4.1 percent in 2024. Overall growth is projected at 4.4 percent over 2022-2030. However, this outlook is subject to significant risks, stemming from the policy paralysis due to the COVID-19 pandemic and the resultant stagnation of businesses. Increasing unemployment rates have emerged as another pressing challenge, and the nation requires structural reforms to strengthen the skills of youth, improve labor market mobility, address information asymmetries, and strengthen labor market statistics. Persistent downfall of the real estate sector and its financial spillovers can also lead towards a wider macroeconomic crisis and economic slowdown.

In addition to internal risks, financial tightening around the globe, highly uncertain global growth prospects, and heightened geopolitical tensions, can also hamper the growth of these export-oriented economies. Risks related to climate change possess another set of challenges as demonstrated by the floods, cyclones, drought, and extreme weather patterns. All these will surely disrupt economic activities. China’s political and military tensions over Hong Kong and Taiwan create uncertainty in all these three markets. All types of socio-political disruptions, starting from mass protests to military adventures, will ultimately derail the growth trajectory of all these markets. As the fund is mostly invested in these markets, a lot will depend upon the internal and external politics of ‘Communist Party of China’ and their overall policies.

Testing My “7 Factor Model for Evaluating Emerging Market Funds” on AIA

iShares Asia 50 ETF generated a low yield, but a high average annual return over the long run. The fund has a high AUM and is trading almost at par with its NAV of $61.77. The portfolio boasted of large-cap stocks primarily from ICT, e-commerce, and financial sectors. It’s not a secret that these sectors are driving the growth of these four economies – China, Taiwan, South Korea and Hong Kong. However, the lack of diversification into healthcare, industrial, consumer staples, energy, utilities, materials, real estate, etc. makes this fund a little susceptible to sector-specific risk. Also, despite being an Asia-based fund, it has no exposure in the lucrative emerging markets of India, Indonesia, Malaysia, Thailand, Vietnam, Saudi Arabia, United Arab Emirates, etc.

Since investors of this fund don’t rely on the dividend yield, the economic growth of these countries will be the prime driver behind the growth of this fund. All these economies are having strong growth potential in the long run. However, in the short run, may suffer from a range of factors such as high inflation, geopolitical crisis, Covid-19 pandemic, military conflict, etc. Thus, this fund will be suitable only for long-term investors, as all these economies are expected to generate strong growth over the long run but witness turbulent times in the short run. Thus, at present, I would suggest a hold rather than a buy with regard to this east Asian emerging market non-diversified fund.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.