Forecasting China leads to better returns: Joske

Beijing-based Stephen Joske points to long-term correlation between China GDP growth and emerging market equity performance as he outlines AusSuper’s expansion plans.
Forecasting China leads to better returns: Joske

Forecasting China’s economy better than others translates directly into returns, Stephen Joske of AustralianSuper told a forum yesterday as he outlined the fund’s expansion plans.

The A$50 billion entity, which has been growing via mergers with other super funds including Western Australia’s Westscheme, is expecting to double in size in four years. At present it has just 8% of assets in emerging markets (including China), but will look to increase this.

Speaking at the second Asia-Pacific Pension Forum in Hong Kong yesterday, hosted by the Association of Superannuation Funds of Australia, Joske notes that AusSuper recently set up an Asian advisory committee that held its first meeting at the end of August.

It comprises Paul Chow Man Yiu, Philip Yan Hok Fan, John Harrison and Raymundo Yu, and a second gathering is scheduled for three months’ time. Their task, among other things, is to assist AusSuper in better understanding Asian corporate culture.

“This committee is to tap into senior Asian financial market and investment expertise, semi-retired people who bring an on-the-ground context that we don’t currently have in the organisation,” Joske says, noting it viewed this as preferable to hiring a consultant.

Last February AusSuper appointed Joske from the Economist Intelligence Unit as its first investment professional in Asia, and he is based in its new representative office in Beijing.

Explaining why it opted for Beijing over Hong Kong or Shanghai, Joske says forecasting the Chinese economy has become crucial, and in Beijing you get access to government think-tanks providing policy insight (he was previously senior Australian Treasury representative to China).

He adds there is less market noise in Beijing, allowing him a clearer picture of how the Chinese economy is performing. Stressing its importance, he produced a slide showing strong long-term correlation between Chinese GDP growth and equity performance across emerging markets.

Later on an audience member referred to a report from consultancy Z-Ben Advisors forecasting that China will jump from 9% of global GDP to 17% by 2020, and from 0.1% of portfolio allocation at present to 20% over the same period.

“If this is correct,” he asked, “is the greatest investment risk faced by provident funds, pension funds and super funds the fact that they will be underweight China in the next decade?”

In response, Joske admits he spends 80% of his time on emerging markets thinking about China, yet its investment in the country is tiny by comparison. “This is definitely a problem,” he notes.

But he points out that current QFII quotas to enter the onshore market are tiny and as a result it is necessary to invest outside (including Hong Kong). “What that is likely to mean is we will have a bias towards unlisted assets until the situation improves,” he adds.

AusSuper’s new Asia advisory committee had already started talking to potential partners on the unlisted side, he confirms.

Stuart Leckie of Stirling Finance (Hong Kong), who was chairing the session, says wryly of the Z-Ben report: “I think the people who worked on that report would be classified as super optimists.”

Still, as it looks to expand Joske admits one problem it faces is that good EM managers – who tend to focus on small-caps and be about $1 billion in size – are running out of capacity.

But he says reaching out to other managers is effectively picking from a bunch that will average each other out. “This begs the question, why not do it ourselves,” he notes.

Joske says by 2014 AusSuper aims to have an internal Asian [and EM] equities team in place “to save on management costs and dramatically expand our exposure fairly painlessly, too”. Next year it will focus on bringing an Australian equities team inhouse.

Earlier in the session, Anthony Fasso of AMP Capital spoke generally about how Asian pension funds had learned lessons from the approach of Australian peers over the past 15 years, and how they were now going about their own international investment programmes.

“If they keep investing in their domestic markets it will have unintended consequences these funds are trying to avoid [overpriced assets],” he says.

He set out six key lessons for Asian pension funds to take note of as they embark on overseas investment. The most critical is a well-defined understanding of their investment objectives; secondly it is knowing how to access international markets.

“A number of government funds are undertaking investment programmes but are not sure how to do it,” he reflects, pointing to Chinese insurers and some small pension funds in Southeast Asia.

“Implicitly they know they need to be doing it, but are faced with questions including which benchmarks, fund managers, asset classes and custodians. These are all fundamental issues.”

The next question is one of resources, whether to employ their own teams, have an internal monitoring team or outsource to a consultant. What data provider do they need to monitor their investments, and do they have staff locally who are sophisticated in overseas investment?

The fourth issue was to be wary of regulatory restrictions on overseas investment, with limits placed in some markets and prohibitive restrictions on trustees in some cases.

Lastly Fasso names the issue of currency risk and whether to hedge or employ a currency manager, and considerations around tax and where there are double taxation treaties in place and how to manage potential leakage from the system.

Asked directly for examples of how Asian pension funds were changing internal guidelines in this environment to move along the risk curve, Fasso points to NPS moving from 1-2% in alternatives to 10%, noting it is investing in the asset class as it is growing at a net $2 billion per month.

He adds that China’s NSSF is outsourcing more now around specific asset classes, and has been adding exposure to domestic private equity and infrastructure. “The next thing they will look to do is more international alternatives,” he concludes.

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