Invest in AI but avoid the hype: The Asian tech stars powering the next digital revolution
Sponsored by Schroders
Asian equities haven't been the most fashionable in recent years, with their attraction tempered by strong US markets and weak confidence in a Chinese recovery.
But this creates an opportunity for investors to seek out innovative companies operating in cutting edge technologies, including artificial intelligence (AI) at lower valuations, say the managers of Schroder AsiaPacific Fund.
This investment trust aims to achieve capital growth by investing primarily in the shares of companies in Asia, excluding the Middle East and Japan, together with the Far Eastern countries bordering the Pacific Ocean.
Over the past five years to February 28 2025, the leading US stock market index, the S&P 500, has gained an average of 18.19 per cent annually, delivering impressive returns on the back of the powerhouse Magnificent Seven tech giant stocks, fuelled by investor excitement over the rise of AI.
In comparison, the MSCI All Countries Asia excluding Japan index, which has 1,052 constituents across the continent, has delivered average annualised growth of 4.86 per cent over the same period.
However, with the boon of outperformance has come higher US stock market valuations and increased global stock market concentration.
Production hotspot: Taiwan is home to 18 per cent of global semiconductor production
This has raised investors' concerns over putting all their eggs in the US stock market basket.
For example, with the launch of China's DeepSeek AI in January, reportedly developed for just $6million, Nvidia saw $600billion drop off its market value overnight as investor confidence faltered.
Asian equities, on the other hand, could offer better value while still benefitting from the AI boom, according to the managers of Schroder AsiaPacific Fund, Abbas Barkhordar and Richard Sennitt.
Behind the scenes of the AI boom
Asian tech players are an essential cog in the AI machine, largely due to Asia's dominance of the semiconductor manufacturing industry.
The South Korean and Taiwanese governments, in particular, have heavily invested in semiconductor research and infrastructure. This has reached a point where the two countries alone now account for some 36 per cent of global semiconductor fabrication, according to Bernstein Research.
With almost a third of its portfolio allocated to technology, Schroder AsiaPacific Fund has seen significant benefits from this dominance.
AsiaPacific Fund holdings such as TSMC, Samsung Electronics and MediaTek are all examples of firms that have been able to cash in on the increasing demand for semiconductors. The investment trust has 40 analysts on the ground in six offices across Asia.
TSMC, the fund's largest holding, is the producer of Nvidia's most advanced chips, and, partly as a result of this, is up 231 per cent over the past five years.
AI isn't going away, that much is clear, but the attention surrounding it could cause investors to lose out on other promising tech fields.
The key, according to Schroder AsiaPacific Fund's managers, is that semiconductor applications extend well beyond just AI, with uses in cloud computing, 5G networks and 'internet of things' technology.
They say these chip producers are 'well positioned' to capitalise on the growing number of semiconductor applications.
Despite the allure of AI, the fund remains diversified across its portfolio, but also within IT itself.
For example, within the IT sector, Schroder AsiaPacific holds Indian IT services firm Infosys, which it says has a strong track record and balance sheet, as well as Taiwanese power electronics manufacturer Delta Electronics, which provides exposure to automation, EV components and renewables alongside more traditional areas of tech.
Schroder AsiaPacific Fund is managed by Richard Sennitt (left) and Abbas Barkhordar
The benefits of an active investing approach
The huge gains made by the S&P 500 over the past few years have supported the popularity of passive index-tracking ETFs among investors.
Due to the recent dominance of a concentrated big tech sector, many actively managed funds have underperformed index trackers if they aren't equally exposed to just a handful of big players.
Yet, many professional investors may have good reason to avoid investing as much in the Magnificent Seven as needed to match the index. They could have concerns over valuations, see better opportunities elsewhere, or have a mandate to invest in different sectors or markets.
Schroder AsiaPacific Fund's managers suggest that while recent experience in the well-researched US large cap market has made it hard for active funds to outperform in this area, in other geographies active funds are still a favourable investment choice.
One strength of active funds in this region comes as a result of the diverse range of performances seen across Asia's markets.
This was highlighted in a year of diverse performance in 2023 when the overall Asia Pacific market excluding Japan was flat. But Taiwan, Korea and India all saw market growth at 23 per cent, 16 per cent and 14 per cent each. Hong Kong, China and Thailand each saw double digit declines.
Last year, as the MSCI Asia Ex Japan index grew 12.51 per cent in 2024, Taiwan's Taiex gained 29 per cent, India's Nifty 50 rose 9 per cent, whereas South Korea's Kospi declined 8 per cent.
The inefficiency of the Asian markets, which Schroders says is due to a lack of research taking a long-term analytical perspective, means that its long-term approach with Asia-based analysts in place can offer an alternative view of the market.
Abbas Barkhordar said: 'As active investors, we are focused on identifying Asian companies with quality characteristics. We look for businesses with strong management teams that generate good returns on capital, and that have a track record of making sensible capital allocation decisions.
'Many Asian businesses have been guilty of poor capital allocation decisions, or decisions which disadvantage the interests of minority shareholders, which have weighed on long-term shareholder returns.
'Corporate governance is therefore a key consideration for us and the consistent nature of our approach, with its focus on quality, should add value over the long-term, in our view.'
Any reference to stocks/sectors/securities/regions in this article are for illustrative purposes only and not a recommendation to buy or sell.
