First State Investments (UK) Ltd., London, closed its Asia Pacific Fund to new investors in February 2004 at £870 million. At about the same time, it also launched another similar strategy investing in Asia ex-Japan called the Asia Pacific Leaders Fund. As of December, the fund had £492 million in assets, spokeswoman Sara Dennehy said.
In Europe, Asian equity pooled funds — including Japan — raised €18 billion in the first 10 months of 2005, according to the London-based Feri Fund Market Information Ltd., a mutual fund market analysis and research company. Last year, asset inflows into Asia totaled €16.1 billion, and in 2003, that figure was €14.7 billion.
With the surge in investments, finding a good manager could become harder.
"Investors tend to employ more active styles in Asia, to capitalize on the higher volatility and risk levels," Watson Wyatt's Mr. Lothian said. "However, given the number of recent strategy closures within the equity space, it's really an increasing challenge to find strong managers."
As a result, Asia-focused boutique managers such as Lloyd George Management Ltd., Hong Kong, have been able to triple its assets under management in the past couple of years. The company now runs about £10.5 billion, mostly in segregated mandates but also some pooled funds, compared to £3 billion at the end of 2003. About 65% of its clients are government and corporate pension funds, said Dominic Johnson, London-based director of marketing for Lloyd George.
"A few years ago, it was very difficult to get in to see people to talk about Asia emerging markets," he said. "Now they're coming to us."
The surge in interest raises questions of capacity, but managers interviewed declined to comment on that issue.
But the enthusiasm for Asia is worrying some analysts, who fear investors might be overweighting Asian equities. David Bowers, chief global strategist at Merrill Lynch, said "performance is going to wane" at least in the short term as asset inflows continue. He believes the surge in Japanese equities is more cyclical than investors realize.
Another caveat is currency movements. In general, investors in fixed-income strategies are more likely to hedge overseas currency than those on the equities side, Mr. Lothian said. adding, "It is almost seen as part of the original risk of investing in equity."
However, some institutional investors will choose to hedge the overweight portion of a portfolio to lower volatility to currency shifts.