First State Super’s efforts to establish a specific exposure to the Chinese market that is not part of a broader emerging market mandate have paid off in the short term, leading to good alpha opportunities, chief investment officer Damian Graham says.
He says the time and resources First State has invested to build a bespoke approach to China are beginning to pay off against a backdrop of China’s increasing weight in global indices, its shift to a consumer-led economy and a general growth bias towards emerging Asia.
Graham will detail First State’s move into China at the upcoming Investment Magazine Equities Summit on September 11 at the Crown Towers, Melbourne, in a session titled “China Rising: the engine of consumption and MSCI inclusion”. A panel including HSBC Global Asset Management’s Asia-Pacific and global equities chief investment officer Bill Maldonado will discuss how Australian asset owners can capitalise on the thematic investment opportunities China now presents.
“Certainly in the last 12 months or so of investing there, we feel it has proven so far in the short term to be a market with greater alpha opportunities than average because of lower levels of efficiency,” Graham says. “We’ve seen very significant alpha for our listed A-shares exposure.”
It took a “reasonable amount of work” to access that specific exposure, as opposed to a broader mandate, he says. This involved getting a Qualified Foreign Institutional Investor (QFII) licence, being allocated a quota and understanding the regulator’s capital controls. Finding a suitable manager proved to be a challenge as well.
“What we were surprised about is there isn’t a very deep lineup of managers managing A-shares in China,” Graham said, and the list was whittled down further when some managers failed to make it through the due diligence process.
Another challenge emerged from regulations declaring that investors can’t trade the same security with two different brokers on one day. In other markets, it is common practice to trade a large amount of securities across a number of different brokers.
“That’s not able to be done in China, the regulators don’t allow that to happen; so you tend to end up having a prime broker-style relationship,” Graham says. Those who have multiple brokers need to closely manage their activities to avoid the risk of breaching these regulations, he says.
First State’s manager tends to focus on technology and consumer-driven companies. It has not invested significantly in financial services companies, or the opening up of state-owned enterprises to outside investment.
In China, the interaction between the private and public markets is important, and First State has “as much or more money” committed in private equity as it does in public securities.
“Private to public is quite a strong activity over there, where [private] companies are coming to market, and we do think from a private equity perspective that it can offer an attractive exit opportunity,” Graham says.
Being invested in the private and unlisted market is also beneficial from an information flow perspective, he says, because this is a key driver of what eventually happens in the public market.