What is the true impact of globalisation on Australian equity investing? As globalisation and the rise of technology mean geographical isolation is no longer a barrier to offshore investment, Tim Samway contributes to Superfunds Magazine to take a look at where we are now and where we should be heading.

1. Ready to take
on the world
equities
Superfunds December 2016 17

2. G
lobalisation has had a radical effect on our world.
From the way we trade, shop and pay to the way
we invest, it has changed our lives forever. The
implications for financial services and markets worldwide
cannot be underestimated. The competitive landscape for
companies is increasingly global, and domestically-listed
companies looking to capture that growth are turning their
attention to opportunities offshore.
But what does this mean for Australian equities investors
and the Australian superannuation sector? Australians have
traditionally favoured domestic over international equities,
but are there any truly Australian portfolios left, and is such
a portfolio likely to produce the long-term earnings growth
investors are looking for?
GLOBALISATION MAY BE INCREASING – BUT GROWTH IS
DIFFICULT TO FIND
Over the past decade, world economic growth has been
weak. Australia’s economy has struggled to transition from
its reliance on the resources sector, and the major economies
of Europe and the US have also faced challenges. Investment
levels are low, productivity growth is weak, and political
instability, Brexit and volatile markets have all taken their toll
on investors’ returns.
Global trade is also slowing. In September, the World
Trade Organisation slashed its forecast for growth in the
trade of goods from 2.8 per cent to just 1.7 per cent, meaning
trade is likely to grow more slowly than global gross domestic
product (GDP) for the first time in 15 years. And given that
GDP growth and trade are inextricably linked, there will
be inevitable consequences for global economic growth. In
fact, as reported in “Why is world trade growth slowing?” in
the October 2016 issue of The Economist, the International
Monetary Fund expects global GDP to grow by 3.1 per cent
this year, which, while positive, is significantly lower than the
3.4 per cent seen two years ago.
However, despite this weakness, some fund managers are
consistently finding growth for clients. Globalisation may have
made the world more competitive, but it has also provided
opportunity. Growth-focused companies based in small
markets like Australia have been forced to confront the limits
on their ability to consistently grow earnings on the back of
domestic sources of revenue alone.
Not surprisingly, many companies have embraced the
opportunity to access offshore markets and as a result of better
growth, have become fundamentally higher quality businesses.
AUSTRALIAN COMPANIES ARE INCREASINGLY GLOBAL
Australian economic growth has been better than in some
global markets, but for Australian companies with domestic
sources of income, the lower global growth environment can
be a double-edged sword. On one hand, they are shielded
to some extent from the worst of the global shocks and
downturns, yet on the other, their ability to benefit from
upside momentum and find consistent growth opportunities
in Australia is curtailed.
For Australian equities investors like Hyperion, focused
on long-term predictable earnings growth, this has resulted
in a portfolio of Australian listed companies – most of which
have global revenue streams. Hyperion believes that well-
managed companies with solid fundamentals and structural
growth opportunities will outperform over the long term, so
our Australian portfolio has a significant international tilt. It
is made up of businesses that derive a significant proportion
of their revenue, and more importantly, their growth, from
offshore operations. They just happen to be listed in Australia.
SUPER FUNDS CAN NO LONGER CATEGORISE EQUITIES BY
GEOGRAPHY ALONE
The flow on effect for super funds is also significant. Funds
that seek to categorise equity portfolios into distinct groups—
Australian or international—are finding it increasingly
challenging and meaningless to do so.
Indeed, some of the larger and more forward-thinking
among them are starting to make investment decisions that
blur the distinction between global and Australian equity
What is the true impact of globalisation on Australian equity investing?
As globalisation and the rise of technology mean geographical isolation
is no longer a barrier to offshore investment, TIM SAMWAY takes a
look at where we are now and where we should be heading.
18 Superfunds December 2016

3. portfolios. Managers of Australian equity portfolios are now
adding global companies to increase the long-term return
profiles of portfolios. In a true blurring of lines, some global
fund managers, Hyperion included, are offering global
portfolios with a number of world class Australian but globally
focused companies in them.
GOING GLOBAL. IT’S THE LOGICAL (AND INEVITABLE)
CHOICE FOR AUSTRALIAN SUPER FUNDS
Globalisation means that relying on domestic markets to
produce long-term growth is challenging. But that’s not the
only reason for considering global equities now – there are
other compelling factors as well.
The global equities universe is wide. Global companies
mostly have larger markets to address and we believe are
fundamentally higher quality businesses than those available
in Australia. This offers opportunities for better return and
greater downside protection for portfolios.
At the same time, there are a number of global investment
themes that are fundamentally affecting which businesses will
succeed in the long term. Many of the businesses best placed
to take advantage of these themes operate primarily offshore.
One example is the shift from traditional print media to
online and digital media. Another is the move from traditional
retail to e-commerce and online spending, with its corollary
of a shift away from cash to electronic payments. At the
same time, the rise of the middle class in Asia and India in
particular, has seen a growing demand for premium products,
including luxury brands and a desire to travel.
Hyperion believes big technology companies are well-
placed to benefit from the digital revolution, and the best-
placed companies to grow earnings over the longer term are
overseas. Google, Amazon and Facebook for example, use
platforms driven by the best features, depth and functionality,
and their addressable markets are global and much larger than
their current revenue levels. In addition, structural tailwinds
and growing barriers to entry mean they dominate their
industry segments, and cross-selling opportunities are myriad,
due to their large and committed user base. They hire the best
and brightest, and when combined with substantial positive
cash flows and a capital-light business structure, this position
provides them with new business development optionality not
available to smaller companies.
INVESTING OFFSHORE IS NOT WITHOUT ITS CHALLENGES
Researching and buying overseas stocks is more difficult than
investing locally. However, it’s also true that the competitive
advantage which many fund managers believe they enjoy
by being closer to their market can be illusory. They may be
closer to the companies, but equally, their decisions can be
more easily influenced by market ‘noise’ and the lure of short-
termism. Hyperion believes that in a world of ubiquitous and
often overwhelming amounts of information, sitting outside of
the centre of a market is a competitive advantage.
Many Australian fund managers are also adding global
research skills to their armoury as they seek to identify long-
term growth from outside their domestic market. Given the
number of Australian companies operating overseas, a certain
level of competitor research has always been necessary, so
it is a logical extension to research further and then invest.
Hyperion’s investment team, for example, has been researching
global companies since the early 2000s, to better understand
the key competitors to its domestically listed stocks.
One option that may appeal to super funds with
reservations about accessing offshore markets is to invest
globally with a local manager. Geographical proximity to the
manager can make for a stronger relationship and the fact that
a local manager is regulated and successful in Australia also
means a lower fiduciary and regulatory risk.
THE BOTTOM LINE
The number of purely Australian equities portfolios made
up of companies listed and operating solely in Australia
is declining. And it makes sense. The size of our market
compared with our global counterparts means Australians
who are focused on growing earnings over the long term must,
by necessity, look offshore.
But what does this mean for super funds? Many are already
on the way to relaxing the arbitrary international versus
domestic equities distinction, and there is no question this
trend will continue as opportunities arise.
In the end, it’s not true to say that Australian companies
without offshore revenue streams will not perform. However,
the hard truth is that global markets can often offer better
opportunities for long-term returns for Australian companies
and therefore Australian investors, simply because of their size
and depth. And it is globalisation that lies at the heart of the
change.
Tim Samway is managing director of Hyperion
Asset Management.
equities
Superfunds December 2016 19