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Passives won’t work in age of tech disruption, Schroders' Fuei says

Passives won’t work in age of tech disruption, Schroders' Fuei says

The sheer scale of technological disruption facing major investment sectors means ETFs and benchmark-based investing could be under huge pressure in Asian equities.

That is according to Schroders’ head of Asian equities Lee King Fuei, who co- runs the Schroder ISF Asian Total Return fund with veteran Robin Parbrook.

Speaking at an event in London, Citywire + rated Fuei said close to 50% of the MSCI AC Asia ex Japan index is weighted towards sectors facing serious threats from large technology-driven changes.

'What does this technological disruption mean for your money? Benchmark and ETF investing is extremely popular these days, but it will become challenged.

'ETFs, even at the best of times, are not something I particularly understand, it seems to be all about buying yesterday’s winners and not necessarily about buying the stocks that will do well tomorrow,' he said.

Fuei said this can become a very costly exercise in an age of technological change and highlighted that such disruption could destroy an investors wealth.

'In 1899 the US index was probably the biggest sector, with railroads being two-thirds of the index. The invention of steam engines and other technology, actually meant that was a big sector at the time,' he said.

In 1899 railroads accounted for 62.8% of the US stock market industry weighting, in 1950 it accounted for 4.2% and in 2000, it accounted for just 0.2%.

This can be compared with IT, he said, which had zero index exposure in 1899 nor any in 1950, however in 2000 it accounted for 23.1% of the index.

'By the time you get to the second industrial revolution, which was all about the invention of electricity and automobiles, railroads were 4.2% of the index.

'If you had bought railroads back in 1899 and have been sitting on that investment, you have been sitting on a sector that has been in a structural decline,' he said.

Asian market focus

Fuei said this potential decline is even more evident in the Asian market.

'When I break down the index, half of it would be in what I call the ‘structurally challenged’ sectors, such as real estate, materials and utilities, these are not the things you want.

'What you should be focusing on is the other half of the index, which continues to offer good opportunities, such as; healthcare, industrials info technology, telecoms, and consumer.'

Both Fuei and Parbrook sit in third place in the Alternative Ucits – Emerging Market Equity Including Asia sector. The duo returned 20.3% over the three years to the end of January 2017. This is while the average manager returned 4.7% over the same time period.

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