APG Asset Management today (November 29) launched its first China fixed income strategy, signalling its commitment to – and high expectations for – the country’s $13 trillion renminbi bond market.
Europe's biggest investor of pension assets, with €528 billion ($581 billion) under management, at the same time highlighted the challenges it sees in directly tapping this asset class.
The Dutch firm is building a China fixed income team and has set up branches in Beijing and Shanghai, amid a rapid recent buildout in Asia. It has also chosen Beijing-based E Fund Management to help it run the bond strategy, as it did for its A-share portfolio.
This expansion push is “a strategic step”, said Sandor Steverink, head of treasuries at APG, “since we expect the Chinese financial markets to grow continuously and [that they] may become as important as the financial markets in the US and the eurozone”.
At the same time, Steverink highlighted hurdles to overcome in China, such as the difficulty of obtaining reliable data on debt issuers in order to assess credit risk and ESG (environment, social and governance) criteria.
His comments were part of a detailed response APG gave to questions posed by AsianInvestor ahead of the public announcement at 3pm Hong Kong time today.
The new fixed income desk – headed by Gregory Suen, who started in October – will be based in Beijing and Hong Kong, Steverink said. Joining Suen “very soon” in Hong Kong will be another portfolio manager, while two analysts will be recruited next year in Beijing to be close to E Fund's fixed income experts, he added.
The bond portfolio went live today with €75 million in assets. It will focus initially on onshore renminbi bonds but as it grows will expand into areas such as offshore renminbi and dollar-denominated Chinese debt.
Moreover, the fixed income strategy will fully incorporate the responsible investment policies of APG’s pension fund clients. These include the aim of increasing investments into assets that contribute to the United Nations’ Sustainable Development Goals.
The Dutch firm is joining other global asset owners, such as the Alaska Permanent Fund, in investing directly into renminbi bonds, though is ahead of the curve by doing so through a team on the ground.
Steverink was reluctant to put a figure on expected returns from the bond portfolio. “It is always sensitive to talk about future returns, which are very market-dependent over a short horizon,” he said. “We will not use significant leverage and will target solid single-digit, long-term returns with a low risk profile.”
Certainly, APG is under no illusions about the hurdles of investing in onshore Chinese bonds. For one thing, it is hard to meet responsible investment criteria in that market.
“Since we use high ESG standards, it will not always be easy to find enough [Chinese] issuers that qualify,” Steverink said, noting that it can be more difficult to find data on ESG in China. This may also lead to longer holding periods for bonds, he added.
What should help is that APG is building a database with information on Chinese companies with the help of E Fund and with academic support. At least, Steverink added, “there are plenty of bond issuers in China, so we can be selective”.
Another hurdle he cited is that it is hard to quantify credit risk in China. APG always does its own credit risk assessments and finds rating agencies useful in other markets for providing an external view on credit risk profiles.
But most Chinese rating agencies assign high ratings that are not always reliable, said Steverink, while the global rating agencies only have limited coverage of the mainland investment universe.
That being said, he is optimistic that the market will develop: “We expect that the quality of the Chinese rating agencies will improve and also that the coverage of global rating agencies will expand.”
Certainly, E Fund expects the local market to benefit from its tie-up with APG. Hu Jian, the firm's managing director of fixed income, said in a statement: “China’s bond market needs to learn and implement more sophisticated principles and rules from developed markets.”
Hu also pointed to responsible investment as something that has some way to go but can progress as a result of insight and input from tie-ups such as that between his firm and APG. E Fund is one of the few Chinese fund managers to be a signatory to the UN’s Principles for Responsible Investment.
Steverink said there were no concrete plans to add expertise in China in asset classes other than fixed income, but he did not rule out the possibility.
“APG started investing in Asia all from Hong Kong,” he noted, “but we understand well that in some markets you need to be closer to get the right information and the right contacts.”
The pension manager is certainly committing a lot of resources to that end in China, and Asia generally. Its push into China caps a year that has seen APG set up natural resources and private equity teams in the region, consolidate its emerging market equity desk in Hong Kong and add more on-the-ground expertise in real estate and infrastructure.
The forthcoming Winter 2019 issue of AsianInvestor features an extended interview with Wim Hazeleger, APG's Asia-Pacific CEO, on the Dutch institution's expansion and investment strategy in Asia.