ASEA: The Dragon Next Door Keeps This Fund From Delivering On Its Promise

By Alex Rosen

Strategy

NYSEARCA:ASEA has a fairly straightforward model. Start with the five 5 founding nations of the Association of Southeast Asian Nations (ASEAN), Singapore, Thailand, Malaysia, Indonesia and the Philippines. Look at all the stocks that are included in the FTSE All World Country Index. Take the 40 largest companies and voila, you have the ASEA fund. The fund is not weighted for equal country representation and as a result is heavily tilted toward Singapore. It is also heavily weighted toward the financial sector.

Proprietary ETF Grades

• Offense/Defense: Offense

• Segment: Non-U.S. Equity

• Sub-Segment: Southeast Asia

• Risk (vs. S&P 500): Moderate

Proprietary Technical Ratings*

• Short-Term (next 3 months): B

• Long-Term (next 12 months): B

* Our assessment of reward potential vs. risk taken

(Rating Scale: A=Excellent, B=Good, C=Fair D=Weak, F=Poor)

Holding Analysis

ASEA holds a tight bundle of 40 stocks from the founding five ASEAN countries. Because the fund has no weighting requirements, the stocks are all large-cap and mega-cap, with a heavy lean toward financials (56% of the total fund) followed by communication services (8%) and real estate (6%). Geographically, Singapore leads the way representing 36% of the assets, followed by Indonesia at 23%, Thailand at 22%, Malaysia at 14% and the Philippines at 5%.

The fund’s top individual holdings* are DBS Group Holdings Ltd. Singapore (DBS) 11.4%, OCBC Bank Singapore (OCBC) 8%, United Overseas Bank Singapore (UOB) 7%, Bank Central Asia TBK Indonesia (7%).

*all holdings are traded on foreign exchanges with ticker symbols connected to those exchanges.

Strengths

When your next door neighbor is the largest bull in the China shop, it’s always a good idea to be prepared to respond to his actions. When China sneezes, all of Asia prepares for the flu. One of the basic tenets of microeconomics is the concept of comparative advantages. When Country A, in this case China, has an absolute advantage in all sectors, Country B should focus on the sectors where it has less of a disadvantage, or a comparative advantage. The ASEAN countries can’t compete with China in base manufacturing; they lack the labor force. They lack the natural resources to compete in extraction, and they certainly don’t have the capacity to compete in agriculture. Wisely, ASEA has turned towards the one sector where size doesn’t matter. Look at the largest banking powerhouses in the world: Switzerland, Panama, Grand Cayman and Singapore. All are small countries that have figured out how to game the system.

While the countries that make up ASEA have a total population of over 600 million, that still makes them only 1/3 the size of China, and the real economic powerhouse, Singapore, is a microstate with only 6 million residents.

Let it be noted that, while ASEA has returned 3.4% over the past year, in the last three months, i.e. the time since when China announced its plan for the future, the fund has returned 14%.

Weaknesses

As mentioned above, China sneezes, ASEA gets the flu. The banking sector is subject to the rise and fall of the Chinese economy. As long as China is humming, ASEA will remain solid. However any bump in the road and poof, the entire fund could collapse like a house of cards. The last three months have looked very good for ASEA as they feed of China like remora fish on whales. When the seas are calm, feeding is aplenty. However, a heavily weighted fund that relies on externalities beyond its control can be in serious trouble if the seas begin to get rough.

Opportunities

Interest rates are climbing. The money supply is tightening and people are looking for alternative places to invest. Singapore and its friends may just be the answer investors are looking for. A stable financial sector that sits next door to the second largest economy in the world is always prime for growth.

Threats

Stormy waters may be ahead. For a long time China has been shaking its fist at Taiwan. They have continually reminded the world that they consider Taiwan to be a part of the larger People’s Republic of China along with Hong Kong. Game theorists have concluded that an invasion of Taiwan leaves no winners. All the world loses here. However, no one has more to lose than the remora fish who’s very existence is predicated on feeding off the giant dragon next door.

The one positive here is that China may look at how epically bad Russia’s invasion of the Ukraine has turned out, and decide it’s best to just threaten but not actually act. China has turned into a global powerhouse, not by building bigger guns and bombs, but by using its large stack of money to really eat at the heart of countries.

Let’s all hope that is the case, because if they do decide to invade and end up in a protracted war with Taiwan/USA, no one wins and we all suffer both short and long term.

Conclusions

ETF Quality Opinion

ASEA is a plain vanilla fund. The investment strategy is very straightforward. Perhaps a little too straightforward as it has led to the fund being overbalanced on both a country level and a sector level. The banking sector in South East Asia is highly dependent on what China decides to do. As long as they play nice, then ASEA is nicely seated. The moment they decide they are tired of rattling sabers and want to move towards action, then get out as soon as possible.

ETF Investment Opinion

Markets overall have been down 10-20% over the past twelve months. It has been very hard to find a place to put money that won’t make your stomach turn. However, in that time, ASEA has been very steady, and it continues to hold course. As a result, we rate ASEA a Hold. We strongly caution investors to pay close attention to what China is doing in order to get a sense of the future course of action for the 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.