Specialist Australian equities investors are increasingly finding their best opportunities offshore, writes Matthew Smith.
Australian stocks are best, right? We love them for the high dividends they pay and the franking credits we get. But managers of some Australian equities funds are investing offshore as a natural extension of their research of local companies. It's a small world, and the tentacles of many ASX-listed companies reach a long way. Here's an example:
Only those able to form strong views on Malaysian stock exchange-listed JobStreet would have been expecting the market's reaction to news that ASX-listed SEEK had acquired the remainder of the hardly known Asia-based media company it didn't own in   February.
SEEK shares went up 18 per cent on the day of the deal in a move that took many equities analysts and the broader investment community who follow the jobs' website by surprise. 
Similarly, REA Group's buyout of ASX-listed iProperty last week could only truly be appreciated by investors able to grasp the progression of south-east Asia's digital classifieds market and the adoption of a bidding model designed to accelerate revenues in online advertising.
There are many other examples of Australian-listed stocks where real underlying value and growth potential are hinged on another company listed in an overseas market.
The fast-growing Domino's Pizza is a good one. Whether the company can meet its high expectations locally will depend on the initiatives and strategies it rolls out that have been formulated and tested in overseas markets by its London and New York stock exchange-listed namesakes.
Then there are the companies listed overseas with fortunes tied to the Australian experience.
Zhaopin and Autohome, both NYSE-listed companies focused respectively on the growing jobs and car markets in China, will largely be informed by the success and failures of similar marketplace platforms in Australia.
Investors are finding their local knowledge extends well beyond Australian shores as technology escalates our view of globalisation.
Thinking globally used to mean backing businesses selling raw materials into global demand; now it means backing ideas generated here but shared with countries at various stages of their journey to consumerism.
"Managing equity portfolios is about the economics of the underlying businesses, not where they happen to be listed," Hyperion Asset Management chief investment officer Mark Arnold says. "Globalisation means geographic borders are becoming progressively less relevant as most industries globalise into one larger marketplace." Hyperion has been incubating a global equities strategy based on ideas derived from its established Australian equities funds.
Long-term holdings in online "market place" businesses including the likes of SEEK and REA have led to Arnold seeking out globally listed companies including UK online real estate hub Rightmove.
Meanwhile, Arnold's knowledge of ASX-listed accounting software companies Xero, Reckon and MYOB led him to invest in Nasdaq-listed Intuit.
"Our domestic portfolios have benefited from our increased understanding of their global competitive landscape. In addition, we have also been able to leverage the deep knowledge we have in our Australian listed investments to enhance our stock selection and portfolio construction on the global portfolio," he says.
More and more specialist Australian equities investors are backing themselves to branch out into investing in overseas markets.
Demand from investors wanting to juice up their global equities allocations is enticing fund managers to test their skills more globally. Many are also saying it's a natural extension of what they do anyway, and investing in larger, more liquid companies is attractive.
"A lot of us are sitting here looking at the structural concentration on the ASX linked to the old-world China economy, but then realising there's so much more, especially when you look at the strong consumption growth in China," says SG Hiscock's Rob Tucker, explaining the opportunity he sees looking abroad. Tucker manages SG Hiscock's new Australia Plus fund, which invests up to 20 per cent of its funds in Asia, mostly in stocks linked to Asian consumerism listed in Hong Kong, China, India, Singapore, Indonesia, Taiwan, Thailand and Malaysia.
Tucker's ideas come mostly from his experiences working in Hong Kong, but they are executed with the perspective of a developed market investor who sees the opportunity in Chinese consumerism.
Some of his overseas investments include Hong Kong exchange-listed Zhejiang expressway, "which is cheaper than Transurban but with a better balance sheet". He also owns Hong Kong-listed luggage maker Samsonite and apparel company Anta Sports.
Last year Perpetual floated its first listed investment company, Perpetual Equity Investment Company, which, like the SG Hiscock fund, has a mandate to invest a portion of its money in offshore companies. The fund can allocate up to 25 per cent in global shares.
Separately, Perpetual has a pure global strategy, which is co-located with its Australian equities team.
"We listen closely to our clients and up until recently they've been saying 'we'd rather you don't go there'," Perpetual Investments group executive Michael Gordon says. "But I get the feeling that might be changing."
Investors who give money to specialist Australian equities firms have traditionally wanted their managers to stay "true to label" because investing outside of a prescribed area can overlap with allocations to other specialist investment firms. It can also raise questions about how performance should be benchmarked.
"I think this might be changing for a few reasons," Gordon says. "First, Australian investors are getting a bit more comfortable with global. Second, they're getting more comfortable allowing their funds managers a little more room to go outside what were traditional boundaries."
While the Perpetual Investment Company LIC has an overt investment mandate to invest a portion of its money globally, Perpetual is also one of several specialist investment firms with the ability to invest offshore equities in its "core" funds. Perpetual, Greencape Capital, Cooper Investors, SG Hiscock, PM Capital and K2 Asset Management all are specialist Australian equities funds managers with a mandate to invest in overseas shares, according to funds researcher Mercer.
"You want to be able to capitalise on opportunities when you come across them," says David Pace, portfolio manager of Greencape Capital's High Conviction fund. Greencape has the ability to invest up to 10 per cent of the portfolio overseas. Among Pace's global holdings are shares in NYSE-listed Chinese online market places Zhaopin and Autohome.
Investing globally is becoming a natural extension at many bottom-up, research-driven Australian equities firms, says Claire Armstrong, a principal at Mercer. "The analysts or portfolio managers are travelling offshore regularly, visiting the global operations of Australian listed companies and talking to suppliers and competitors ... they're researching global companies, comparing their business models to Australian firms many operate in the same market," she says.
But institutional investors, including superannuation funds, traditionally like funds managers to "stay in their boxes", which is why it's likely more specialist Australian investment firms aren't going global, Armstrong says.
Institutional investors employ an asset allocation model and prefer to invest in pure play strategies.
The Aussie-global split funds can also be confusing for individuals who might use relative benchmark performance as a way to select a manager. "The comparison with an Aussie benchmark can be misleading - hopefully managers are transparent about where their value add is coming from," Armstrong says.
However, she says an allocation to overseas shares can be no more misleading than comparing the returns of fully invested managers with those who can invest up to 20 per cent in cash at any time, "which happens all the time".
Funds managers who invest in offshore companies as an extension of their Australian equities strategies will argue that any boost it gives their returns over pure domestic managers is fair because it takes conviction to make that decision.
"Ultimately what happens is Aussie managers invest regionally [throughout Asia] rather than just in Australia," says Greencape's Pace, who agrees it's a challenge selling the concept to institutional investors.
He says it's natural for Australian investors to want to look offshore, not just because Australian companies have their fortunes interconnected with companies overseas, but also because of the growing pool of capital chasing a relatively shallow market here.