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Effective Asia allocations need direct investment

To receive the full portfolio diversification benefits and to take advantage of all of the Asian investment opportunities individuals need direct holdings in the overseas markets, according to a specialist portfolio manager.

In particular, Ellerston Capital lead portfolio manager Mary Manning warned investors an effective allocation to Asian markets could not be achieved through shareholdings in Australian companies.

“Many people say to me about investing in Asia ‘I don’t need to, I own [stocks in Australian food and beverage company] Bellamy’s’ or ‘isn’t investing in Asia like doubling up on my BHP holding’,” Manning said during her presentation at the annual Australian Investors Association National Conference on the Gold Coast.

“These kind of comments bug me because Bellamy’s – that’s indirect exposure and it’s a tiny company that has exposure to one tiny part of what’s going on in Asia. If you really want exposure to Asia, you cannot get it indirectly through small-cap stocks.

“And the BHP comment is basically saying all Asia is China and China is a growth story for commodities and so I’ll just get it via a commodity company I understand locally.

“Again, that is totally different. Asia is not China.”

According to Manning, this type of investment approach to Asia prevents individuals from taking advantage of the market opportunities across 13 different countries.

“There are a lot of different thematics going on in Asia, whether it’s Chinese capital market liberalisation, or the rising middle class in India, infrastructure builds in some of the less developed countries, and this doesn’t have anything to do with technology disruption or demand for commodities through BHP,” she said.

She pointed out investors should not allow poor corporate governance to be an excuse not to invest in Asia either.

“In the past, corporate governance was pretty bad, but it’s gotten way, way, way better. This is not the 1990s in Asia; this is 2018 where you have global world-class companies that have excellent disclosure,” she said.

“They take ESG (environmental, social and governance) seriously. They have world-class management teams. The corporate governance excuse cannot be used anymore.”

Manning emphasised she was not saying corporate governance in Asia is perfect, but noted corporate governance in other markets in which individuals are more likely to invest is also far from perfect.

She used the cases of WorldCom and Enron to illustrate this point.

“Enron and WorldCom to date are the biggest corporate frauds in the history of investing and they are both US companies,” she said.

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