The $7 billion Melbournebased industry fund HOSTPLUS has historically allowed its developed market active managers a discretion to explore the emerging markets, but it’s a discretion that chief investment officer Sam Sicilia says they have been unwilling or unable to use. “We let them go up to 15 per cent in emerging markets but they’ve tended to sit at 3 to 4 per cent. It’s harder for them because they’re fishing from a big pond.” With its average member aged 26, Sicilia says the HOSTPLUS demographic has a lot of affinity with the youthful countries of Asia – “the region they will be retiring into”. For this reason, the fund is in the “early stages” of considering its first specialist Asia ex-Japan mandate, however Sicilia says this will be a satellite growth play in the $50 million range, which will complement its existing emerging markets managers, Marvin & Palmer and Legg Mason affiliate, Esemplia. An Australian investor taking any more than such a satellite play to Asia needs to consider how much beta diversification they are getting, according to chief investment officer at the Victorian Funds Management Corporation, Justin Pascoe.

“Asia, particularly China, is clearly a key engine of global growth and it is well-understood that the Australian economy is a major beneficiary of this. As part of our broader emerging market equity exposure, we are investors in Asia directly but also are mindful of the indirect exposures we have to the theme via the Australian equity market, the AUD and also monetary policy. In other words, like all themes in our client portfolios we have to consider the embedded correlations.” Having spent 13 years working in Asia for Goldman Sachs Asset Management and State Street Global Advisors, Pascoe is a firsthand witness to the favourable long-term demographics and savings rates in the Asia region, and its shift from export-oriented trade to a sustainable demand-driven story. As such, VFMC is further down the road of Asian specialisation than most of our institutions. “We have some specific investments in Asia-only mandates [Treasury Asia Asset Management has one – former VFMC board member and Treasury Group part-owner Mike Fitzpatrick used to have to declare his interest] and have recently allocated to the domestic China A-share market via the QFII mechanism to gain exposure to a different type of Chinese company, and of course the RMB.”

Russell’s Parrish says that regardless of any other considerations, the Chinese currency is so obviously undervalued that holding some of it through an A-shares portfolio looks a “pretty safe bet”. However, Pascoe spent long enough watching money rush in and out of the Asian region not to be too wide-eyed about its prospects overall. “While a believer in the longterm dynamic, a more general concern that I have with attractive long-term stories is the potential for crowding in the short-term by ‘enthusiastic’ investors. Asia and emerging markets more generally are definitely a growth story but you need to consider how much you pay. Emerging markets have recently traded to a premium P/E multiple compared to their developed market peers, as a result of strong fund inflows. The superior fundamentals probably justify that, but it is a question of degree and reward for the risks being taken.” Pascoe says that if anything, some investors are currently looking to play Asian growth via the relatively cheaper Japan.