The vexed issue of Australian equity correlations to Asian equities got an airing at last month’s CMSF conference in Brisbane. Mercer chief investment officer Russell Clarke was asked [by Patricia Newby, of Invesco] whether tilts towards Asia and China in particular should be avoided by Australian investors, given they risked merely “doubling up” the large exposures already inherent in the typical Australian equities portfolio. Given Invesco is mainly a provider of Australian and global equity products here, Newby probably had a vested interest in questioning regional specialisation. However, Clarke agreed that the linkage was significant and that an Asian tilt did not do much to diversify a portfolio already rich in ASX-listed shares. However Mercer still thinks Asian markets are underrepresented in the average portfolio relative to their underlying contribution to the world economy, so this year it’s engaged in a trade where higher exposures to emerging markets managers have been bought, with the money taken away from Australian equity managers.

Getting your money out again “I will say this about China and India and some of the other Asian countries – they love to see your capital, [but] they’re not always so fond of giving it back to you,” says JANA’s John Coombe. The consultant is speaking as one who believes the “main game” in Asia is not actually equities at all. “You have to question a significant overweight to maturing capital markets, like many of them are in Asia. Because we all know that immature markets have accidents.” JANA has recommended some clients take a very “Australian” approach to getting set in China, and do so via direct property investments. However JANA’s unlisted plays in both China and India are “fraught with difficulty”, Coombe says, “because of the way you have to structure up investments. You spend a fortune just to make sure you can repatriate capital at the end. With China for instance, you need to know the countries that have tax treaties with the CCP, which means you end up with a trust in the Maldives.” In a country like China not bound by Western contract law, relationships are paramount and Coombe says the managers to which it assigns client money in the region should ideally have been there for decades.

“The Chinese funds management industry only started in 2000, so you meet a lot of guys up there boasting about their four- or five-year track records. But one of our favourite managers up there just does Chinese and Indian private equity, and the chief executive is an Australian guy, Peter Amour, who’s lived in Hong Kong for 25 years. He went through the late 1990s, and he wears the battle scars. He knows the intricacies of how things work – of how China is a centrally planned economy, but how much control the provincial governments have within that. He’s also got the Western mentality we need from a tax and income distribution point of view.” Coombe says that is important in a market where the rules can change quite suddenly. For instance, the expected returns of JANA clients on their Chinese unlisted property investments “went down 3 or 4 per cent and the risk level went up” about two years ago, when the Government “changed the tax rules overnight” in an attempt to cool property speculation in the country. But post the Global Financial Crisis, Coombe says those rules were recently changed back to how they had been.