There are also second order effects across the global economy, and a broader global sentiment effect that has led to markets moving in tandem to Chinese news. This tempers our view on the size of a specific tilt, as the China and India growth theme does not exist in isolation of other existing investments held by superannuation funds. Ac tive and lis ted the way to go From an access perspective, there are attractions in using listed equity markets to achieve an increased tilt to China and India. The benefits of liquidity and low costs are significant relative to unlisted opportunities. We see advantages in an active management approach as GDP growth will not naturally transfer to aggregate stock market returns. In China in particular, companies may also have other objectives than simply return on equity.

Additionally, in highly volatile markets, a focus on valuations and downside risk management is also critical. There are also flexibility advantages in investing in China and India via a diversified emerging market portfolio, rather than a country specific allocation. The significant rally in these two markets over 2009, high volatility and valuation cycles mean that there is a benefit in having the ability to decide not to invest in these markets from time to time based on bottom up fundamentals. Investing in unlisted asset classes is another way to access growth in China and India. Frontier’s experience over the past decade and longer in unlisted investments makes us cautious of the combination of heightened structural risks in emerging markets with the illiquidity of these investments.

Structural risks are significant and include regulatory, legal, political risks, maturity of capital markets, ability to repatriate capital or income, foreign exchange risks, fairness, transparency and cultural and language barriers. These risks must be assessed carefully at the individual investment level as they can significantly impact the return potential of an investment. Whatever the apparent attractiveness of an investment, investment discipline requires the same high standards of manager quality as are applied globally, local expertise, appropriate return targets and alignment with local interests as critical hurdles for unlisted investments in China and India. In private equity, managers are less tested in these markets relative to developed markets like the US and Australia.

While there is merit in being able to more specifically target investment opportunities, the current reliance on the IPO market for exits makes private equity a less compelling opportunity relative to listed markets. Asian exposures are also slowly increasing in global private equity portfolios and allocations will grow over time without the need for targeted investments. Infrastructure investing looks attractive in both India and China from a demand perspective. There are significant requirements for new infrastructure, and assets with greater income protection can also benefit from the growth potential of these markets. India is more attractive than China in this asset class, as it has a longer history and more established framework for private infrastructure ownership, and a heightened need for private capital to fund infrastructure requirements.