HONG KONG The Warren Buffetts of the East failed to live up their reputations in 2012, when big-name investment gurus made the wrong calls on China while markets in India and Southeast Asia raced ahead to rank among the top performers globally.
Between January and November this year, Franklin Templeton's Mark Mobius and Value Partners' Cheah Cheng-hye fell short of their benchmarks by the widest margins in more than a decade, data from Thomson Reuters Lipper showed.
Sustained underperformance by the top names could push investors towards cheaper, passively managed index and exchange traded funds (ETFs), a trend that has taken hold in Europe and the United States where active funds find it tougher to exceed benchmarks.
"The (Chinese) economic slowdown in 2012 certainly had a negative impact on the consumer sector, an area I am overweight," Fidelity's Anthony Bolton, another star portfolio manager who failed to beat his benchmark during the period, told Reuters in an email.
"The fund's focus on small and mid-caps also hurt performance," said Bolton, who returned three years ago amid much fanfare to chance his arm in China.
All three A-listers were undermined by their bets on China, whose stock market, measured by top Shanghai and Shenzhen listings CSI300 .CSI300, fell 8.8 percent through November on fears of economic slowdown, and as a once-a-decade political leadership change was completed in that month. The index has since rebounded and is now up 4.5 percent for 2012.
By contrast, share markets in the resilient Southeast Asian economies have rallied, and Indian shares have risen .BSESN by a quarter so far this year, helped by $24 billion foreign portfolio inflows.
Mobius performance graphic: link.reuters.com/bag84t
Cheah performance graphic: link.reuters.com/cag84t
Bolton performance graphic: link.reuters.com/dag84t
Bolton's Fidelity China Special Situations was up 5.8 percent in the 11 months to end-November, 8 percentage points behind its benchmark MSCI China index. That came after missing its gauge by nearly 18 percentage points last year.
His play on China consumer stocks backfired, with sector shares falling 5 percent on average compared with an average 15 percent rise in consumer staple stocks in Asia Pacific, data from Thomson Reuters StarMine showed.
Mobius also paid a price for his heavy China exposure, with almost 30 percent of the $16.9 billion Templeton Asian Growth fund invested there. Those positions proved to be a drag on performance: the fund notched just 10.6 percent return, lagging the benchmark MSCI AC Asia ex Japan index by 8.3 percentage points and logging its biggest gap since 1999.
The fund suffered from its investment in some energy stocks, as the sector was impacted by swings in commodity prices, Mobius said, with poor show by automobiles also hurting performance.
His fund's top holding at end-September was PetroChina (601857.SS), the nation's dominant oil and gas producer, Lipper data showed, a stock that fell by 13 percent in the year to end-November.
Value Partners Classic Fund, managed by a team led by Cheah, was 16.6 percentage points behind Hang Seng index .HSI, its widest gap since 1999, data from Lipper showed.
"This macro-driven year has been a long winter for value investing, as investors have stayed on the sidelines remaining defensive," a spokeswoman for Value Partners said.
BAD NEWS FOR MONEY MANAGERS
The underperformance by stellar names highlights the struggles large, actively managed funds face in trying to beat their benchmarks in the West and now in Asia, a trend likely to push investors towards cheaper index and ETFs.
That would be a blow to active money managers who typically charge a fee of 1.5 percent of assets under management, nearly three times that of ETFs, Lipper data showed.
ETFs blindly track indices and require no management or research, making them cheaper than active funds run by teams of investment professionals.
To keep charging premium fees, active managers would have to show results. Expectations of outperformance are especially high in Asia due to the region's relatively under-researched and inefficient markets compared with more mature economies.
Otherwise, active managers risk losing business to passive investment funds, a firm trend in developed markets, as a result of their low cost and of the failure of actively-managed funds to consistently outperform.
This year U.S. investors embraced low-cost, passively managed index funds. For instance, customers ploughed $130.4 billion into Vanguard Group's mutual funds and ETFs in the first 11 months of 2012, setting a new record for annual inflows.
The trend has also benefited BlackRock's iShares ETF unit, while hurting more traditional firms like American Funds, Dodge & Cox and Janus Capital Group.
That shift is gaining momentum in Asia. Assets managed by ETFs to invest in Asia Pacific topped $150 billion by November, from around $34 billion a decade ago, Lipper data showed.
In contrast to the big beasts of the Asian investment world, more obscure funds like the $109 million Manulife Global Fund-Asian Small Cap Equity and $96 million Australian Leaders fund have beat benchmarks by more than 20 percentage points.
Manulife's fund delivered 35.3 percent return, nearly three times that generated by its benchmark FTSE World Asia Pacific Small Cap ex Japan index as of end-November.
Still, both Mobius and Bolton are positive on prospects for 2013. The nature of growth in China is changing as the country's export- and investment-driven model is gradually superseded by one driven by consumption, Bolton believes. This means the pace of growth will be slower, but more resilient.
"The economic cycle is now in its favour, as is the political process," Bolton said.
(Additional reporting by Sinead Cruise in London; Editing by Daniel Magnowski and Denny Thomas)