US public pension funds may be increasingly interested in investing in Asia, but so far they have focused mainly on doing so via public market investments.
There are at least 230 state pension funds in the country, and typically their biggest exposure to the region is through listed equities. However, their interest in also gaining access via alternative assets appears to have begun to rise too.
One example is the $241 billion California State Teachers Retirement System (Calstrs). Today just 6% of its roughly $32 billion real estate portfolio is in Asia Pacific, and most of that sits largely in Australia and Japan.
All-told Asia accounts for 7.5% of its $20 billion in private equity assets, Calstrs chief investment officer Scott Chan told AsianInvestor in June. The fund is moving to strengthen its knowledge of the region, he said, but any increase in illiquid exposure will be dependent on opportunities.
Indeed, most American pension funds appear to make private investments opportunistically for the time being. There are few signs that any are planning to make concerted alternative asset strategies in the vein of certain global asset owners.
Even the pioneering Texas Teachers, with its plan to set up in Singapore and large exposure to private markets globally, will initially focus its regional efforts on listed equities in Asia via hedge funds and direct stock buying.
However, the $153 billion fund does plan to focus more on private market investments down the line, CIO Jerry Albright has told AsianInvestor.
There have been some earlier movers, though. The Municipal Employees' Retirement System (Mers) of Michigan conducted its first private equity transactions in China around five years ago, and it intends to seek out co-investments in the country, according to its CIO, Jeb Burns.
It has also looked at private debt opportunities there, he added, “but we need more time to be comfortable [buying such assets]”.
“Obviously we’re being a bit more reflective in the current environment [in light of tensions such as around the US-China trade war], but we will continue to look for opportunities.”
As is typical for US state pensions, Mers does not provide precise figures for its exposure to Asian assets.
Ultimately, momentum has been gradually growing towards regional Asian mandates in areas like private equity and real estate, said Mike Keough, San Francisco-based head of core institutional sales at DWS, Deutsche Bank’s asset management unit.
That trend started with private equity some 10 years back, then more recently there’s been an uptick in interest in regional core property strategies, he told AsianInvestor.
"If you're a big pension fund and you have a global benchmark and believe in diversification, then why not diversify your real estate portfolio, which has historically been very biased to the US?"
But even that trend is moving slowly, Keough said, "as it takes time for them to get comfortable".
"I would say you're still going to see more regional or even global mandates that have exposure to Asia rather than single-country mandates, with the exception of China," he added. "For a while now there's been interest in China and China-specific funds, because of the growth of the [country's] middle class and GDP."
This article has been adapted and updated from the feature 'US state pensions' Asia dilemma' in the latest (Autumn 2019) issue of AsianInvestor magazine.