Douglas Loh

The creation of an emerging companies category for the Significant Investor Visa (SIV) program has the potential to be an important source of capital for emerging listed Australian companies, said Mr Douglas Loh, head of equities, Acorn Capital.

Speaking at the Basis Point third annual Significant Investment Visa conference, Mr Loh said: “The changes to the SIV complying investment categories will provide a valuable additional source of funding for emerging listed Australian companies and will promote the growth of this sector.”

He said the target for the SIV is generally wealthy Asian investors looking to immigrate to Australia.

Mr Loh said, “Often they have children who have attended or are looking to attend universities in Australia and they are attracted to the lifestyle and opportunity here. The SIV program is a good way for them to understand a more mature and developed investment market and to eventually gain Australian residency.

“With residential property excluded from the categories of complying investment status for SIV investors, it removes the risk that SIV investors will drive up prices in an already hot property market.”

The Acorn Capital Microcap Fund is one of the few funds to invest in Australian emerging companies/microcaps that complies with the Government’s new SIV investment framework. The Fund has a 14-year track record of investing in microcap stocks and building a diverse portfolio that Acorn Capital believes can generate long-term outperformance.

By identifying and exploiting mispricing in the microcap sector, the Fund has successfully outperformed its benchmark over the long term, and has returned 9.2% p.a. since inception.[1]

Mr Loh said, “We believe SIV investors, in particular, will look to established and well known managers that can demonstrate longevity and good risk management controls.

“Previously, the bulk of money flowing into Australia through the SIV program was into passive investments, such as government bonds and residential real estate schemes, which already attract large capital flows.”

On 1 July 2015, the Government changed the SIV investment framework so that investors need to invest at least $5 million over four years into three categories of complying investments, which must now include:

• $500,000 in venture capital and growth private equity funds
• $1.5 million in emerging companies
• $3 million in balancing investments – complying investments include Australian corporate bonds, shares and property (excluding residential) through managed funds or listed investment companies.

[1] Returns are calculated after fees and expenses and assume the reinvestment of distributions. Past performance is not a reliable indicator of future performance. Inception date for performance calculations is 28 February 2001. Benchmark is the Acorn Capital/SIRCA Microcap Accumulation Index. SIRCA is the Securities Industry Research Centre of Asia Pacific.

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Evan Erlanson

Investors who remain cautious of Asian investment, and view the region as outside mainstream investment consideration, are missing out on valuable opportunities according to Asian fund managers Seres Asset Management and Acorn Capital.

Mr Evan Erlanson, chief investment officer of the Hong Kong based Asian investor Seres Asset Management, says by discounting Asian investment, investors are missing out on growth opportunities that cannot be found elsewhere in the world.

“Asia represents a larger demand pool than all other emerging markets combined, allowing it to support more sustainable growth and innovation over the long term,” Mr Erlanson says.

Mr Douglas Loh, head of equities at Acorn Capital, and manager of the Acorn Capital Asia Small Cap portfolio, agrees that Asian exposure should form a part of every diversified portfolio.

“Asia is characterised by market inefficiencies, a large investment universe and higher economic growth rates driving a rapidly expanding middle class,” Mr Loh says.

The fund managers say that growth prospects in China will increase investment opportunities in the region.

“Until recently, China’s economic growth has been driven by exports. However, the next stage of its development will see a growing consumer class purchase goods and services associated with a higher standard of living,” Mr Loh says.

“A wide array of industries, including food, household goods, education, travel and health care spending for personal wellbeing will benefit from this growth.”

He cites recent research that shows by 2022 more than 75 per cent of China’s urban consumers will earn between RMB 60,000 and 229,000 a year (AUD$10,300 and $40,000). This compares to 4 per cent in 2000.[1]

“In purchasing power parity terms, this range is between the average income of Brazil and Italy. This demand is not only positive for Chinese companies, but for the region as a whole.”

Mr Erlanson says China is in the early stages of financial reform that will eventually result in higher real rates, lower asset prices and the more rational allocation of capital.

“This process is likely to help resolve some of the excesses of the past 14 years and give investors more opportunities to make rewarding long-term investments in Chinese equities,” Mr Erlanson says.

As with any investment, it is important to be aware of the factors that will affect future returns.

Mr Erlanson says those investing in Asia need to avoid companies with a high degree of government control or ownership, or those in a position to perform ‘national service’.

“As a fund manager, we try not to think of Asian markets in their current form. Instead, we anticipate how they are likely to develop structurally over the next decade and choose the companies that we believe are most likely to rise to the top,” Mr Erlanson says.

“Such a strategy will deliver the benefits of Asian growth even if the broad market does not perform well.”

Mr Loh says Asian small cap investors must determine their risk appetite and their investment (time) horizon.

“By their nature, small caps in any country are more volatile than large caps, so your time horizon should be long enough for the investment to pay off; at least five years and preferably more.”

While small cap investments should not make up the largest portion of your portfolio Mr Loh says the Asia ex Japan small cap space is an ideal hunting ground for investment opportunity.

“There are approximately 5000 companies in the universe across 10 countries and 12 industries. A huge proportion of these companies are not on the radar of investors and professional analysts, meaning the opportunity to discover well-managed small companies generating attractive returns for investors is high,” he concludes.

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[1] Mapping China’s middle class, Dominic Barton, Yougang Chen, and Amy Jin – McKinsey & Company, June 2013

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