Asia, demographics and growth engines have led to a greater emerging market exposure for Hostplus, says chief investment officer Sam Sicilia. The superannuation fund recently invested $140 million as part of a diversification strategy that encompasses global emerging markets.
“We also had a focus on where the growth engines in the world would be, and as it turned out, it’s Asia, which is emerging markets,” Sicilia told IM Online.
“In reality, we’ve had an emerging markets exposure for a long, long time. But… you really need conviction in order to say I want 30 per cent of my international equities exposure to be emerging markets. That’s not just a little exposure here and there, that’s a third of your allocation.”
According to Sicilia, it was only a few years ago that the fund recognised the vast opportunities in emerging markets, and that it needed to “either put up or shut up”.
“And putting up really meant not just throwing a dollar or 50 cents… it’s really saying a third of your international equity exposure to emerging markets. That’s the conviction that happened a few years ago, and we’ve been slowly building that up. Today we’re almost there.”
The fund may even “go more”, though he says so with a level of caution due to changing circumstances.
“I think we can do more than a third of our international equities exposure because in the near term the fund keeps getting bigger, but I don’t see any other places to put the equity exposure,” he said.
Where the Host has the most
At present the fund’s total listed-equities allocation comprises both Australian and international assets and accounts for roughly 53 per cent of Hostplus’ total fund, or approximately $6 billion of a total $11 billion.
Of this $6-billion allocation, international equities amount to $2.4 billion (22 per cent of total fund), while its emerging markets exposure makes up roughly 6 per cent.
The latest mandate went to investment manager Martin Currie, bringing Hostplus’ emerging market equity exposures up to six through “garden variety” asset managers – Northcape, Neuberger Berman, Cooper Investors, Proa Partners in Singapore, and a Wellington Asia excluding-Japan strategy.
As for the capital to fund greater equities exposure – in particular emerging markets – Hostplus sold off its sovereign bonds and doesn’t intend to build them up again.
“The interest rates are at historic lows and the yields from sovereign bonds meant there were opportunities elsewhere,” he said.
Sicilia believes that the future will see more money diverted towards emerging markets, specifically emerging markets equities.
“These other funds are constrained by how much they can put into equities, because their time horizon is not as great as somebody whose member demographic is relatively young, like Hostplus.”
He said other funds are taking the same opportunities, but queries whether they all have the same resources.
“The kind of things I’ve been talking about – Asia as the growth engine, the demographic story – that’s nothing, it’s not inventing sliced bread. Everyone can see that. The problem is, where are they going to get the money from in order to divert it. Which Peter do you rob to pay Paul?”
Ultimately, Sicilia said investing in an emerging market – Asia or elsewhere – today may not provide an outstanding return over a 12-month period. But, he added, the fund isn’t looking at a short timeframe for returns. Instilled with confidence about the move, he said the fund has “checked what can be checked” and has time to see it through.
“The only thing that can really go wrong is if we make a mistake. In other words, we didn’t do our work properly. So yeah, I’m confident, and so we wait.”
|As part of its international equities exposure, Hostplus has a focus on Asia, including its emerging markets. Importantly, the focus has directed the fund to look for opportunities beyond equities, including direct property in China. Meanwhile, the fund already has retail property exposure in Malaysia and Singapore. While the firm has been looking at Chinese property for four years, it is yet to commit, despite extensive due diligence, says Sicilia.
“We’ve been over to China three or four times to meet with them and have a look at the site and talk to lawyers and accountants and tax advisers, and in the end, the board said we’re just not comfortable with this. And you know what, you have to respect that. Because if we knew better, then why wouldn’t the board say yes?
“And so, we don’t feel that because we’ve been looking at something for four years, that we’ve had enough… let’s just do it. This is other people’s money.”
While the fund carried out a thorough investigation, operating in a region with a different legal system, tax regime and different levels of government to understand involved a lot of learning.
“But you have to do the time and the pain to get a level of comfort. If you can’t sleep at night, we don’t do it,” he says. “It won’t end until we make an investment, but we’re not going to rush it.”
For now, the fund has seeded a mandate with US firm Siguler Guff, a first for an Australian fund, with private equity investment to the tune of US$100 million.