There is certainly a lot to be said for this view. As specialists in investing in Asian smaller companies, we pay extremely close attention to the unique strengths and weaknesses of each of the stocks we consider for inclusion in portfolios.

Ultimately, though, the bigger picture must count for something. Take South Korea, which Donald Trump’s least favourite newspaper, the New York Times, recently described as “lurching from one political crisis to another”.

The turmoil began in earnest in December last year, when the country’s conservative leader, Yoon Suk Yeol, attempted to impose martial law. It was the first such move since South Korea became a democracy in 1987.

Faced with public outrage and protests, the National Assembly vetoed the imposition. The crisis eventually led to Yoon’s impeachment and removal. An early presidential election followed – but not before South Korean markets had suffered a sizeable slump.

The new president, Lee Jae-myung, represents the left-wing Democratic Party. A former factory worker and lawyer, he campaigned on a promise to increase spending, revive consumer confidence and expand the nation’s advanced manufacturing facilities.

Irrespective of whether your investment approach is primarily top-down or bottom-up, this is the sort of development that merits notice. Perhaps most importantly of all, it suggests South Korea’s Corporate Value-up initiative is alive and well.

A political and economic climate conducive to smaller companies

Corporate Value-up has its roots in Japan, where ambitious governance reforms have helped unlock shareholder value after decades of businesses determinedly hoarding cash. Several other Asian economies are now keen to follow the same path to investors’ hearts.

The idea centres on nothing less than what South Korea’s Financial Services Commission has described as “fundamental changes in our capital markets”. It requires listed companies to raise dividends, buy back shares and emphasise shareholder-friendly policies.

Interestingly, larger entities might find it tougher – and could even be inherently less inclined – to achieve these goals. A key reason for this is the phenomenon of cross-shareholding, which is notably popular in Asia.

Cross-shareholding involves companies holding shares in their business partners. Long regarded as controversial, the practice is frequently underpinned by ownership models that are dominated by wealthy families with no incentive to disrupt the status quo.

At the lower end of the market-capitalisation spectrum, where our focus lies, the absence of such structures can encourage better stewardship. Yet the brightest prospects are seldom immediately apparent to the wider investment community, as South Korea’s smaller companies – like those throughout Asia – tend to be under-researched.

It is easy enough to illustrate this point. Many investors will be familiar with the likes of Samsung or Hyundai – often through ownership of their products – but most would struggle if challenged to name, say, two or three other South Korean businesses.

Local knowledge, an on-the-ground presence and direct engagement can therefore make a significant difference in the search for opportunities. This is how an investment team such as ours aims to identify hidden gems.

Strong management, continued innovation and long-term potential

Many of these companies fall into the category of “picks and shovels” investments – which is to say they are underappreciated yet vital engines of progress. This is most obviously the case in technology-related value chains.

Park Systems is a good example. It specialises in industrial-use atomic force microscopy, a high-resolution imaging technique that visualises and measures surface properties at the nanoscale level. Demand for its products is being driven by advances in fields such as semiconductors and biotechnology.

Similarly, Leeno Industrial is a classic behind-the-scenes enabler. It makes testing equipment for printed circuit boards and other components crucial to the hyperconnectivity that has come to define life in the 21st century.

Our South Korean holdings also include Hyundai Marine Solution, a stablemate of the aforementioned car manufacturer. An asset-light engineering services company that caters to the shipping industry, it has an aftermarket business that generates impressive recurring revenue.

We also like Classys, which operates in the burgeoning aesthetics arena. Its export markets currently include Japan and Brazil, with the US and Europe poised to follow. Revenues are growing at a rate of around 30% a year.

In our view, these businesses already demonstrate impressive governance. They have excellent management, a clear commitment to innovation and solid long-term growth potential. A renewed push for the Corporate Value-up programme should see other smaller companies follow suit.

The truth is that we would likely invest in such businesses even if South Korea were still in the throes of political upheaval. Now that calm has been restored, though, we believe their appeal is even greater than before.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.

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