Border to Coast Pensions Partnership (Border to Coast) - one of the largest public sector pension pools in the UK - appointed two China equity managers for its China exposure in October last year. The aim? To target greater China A-shares opportunities and boost and deepen its ESG credentials in the region.
One year on, and portfolio manager Anthony Petalas spoke with AsianInvestor about how the pension pool has carefully navigated the perils and pitfalls of a China still rich with promise.
Border to Coast currently manages a dedicated Emerging Market Fund, which was recently restructured into two ‘sleeves’ - a portion of a portfolio that can be traded separately - with the ambition of carving out a place in China.
This sleeve of the fund is managed by the two China specialists while an internal Border to Coast team manages the Emerging Market ex-China sleeve of the strategy.
As of the end of October this year, a total of £384 million ($530 million) has been deployed to the two managers, Hong Kong-based FountainCap Research & Investment (FountainCap) and UBS Asset Management.
Border to Coast oversees the investment of pensions assets, bringing together £55 billion ($75 billion) in investments of 11 like-minded Local Government Pension Scheme funds. It manages £34.1billion of the pool as of October 27.
WHY CHINA A-SHARES
“The dominant exposure of China in emerging market benchmarks will only increase as index providers fully integrate into the entire A-Shares universe,” Petalas told AsianInvestor.
He emphasised the breadth and depth of alpha opportunities in the China A-shares market.
In 2019, MSCI increased the inclusion ratio of China A-shares from 5% to 20% in the MSCI Emerging Markets Index.
As one of the institutional investors globally who are now increasingly re-evaluating the appropriate allocation framework of their equity portfolios, Border to Coast is one of the early movers among UK pensions.
“It's important to have people on the ground with local expertise on the social, economic, and regulatory (ESG) framework in order to assess risk and opportunities in the Chinese market especially in relation to ESG integration,” he said, adding that the pension pools turned to FountainCap as one of the managers to tap this expertise.
Border to Coast has both internally and externally-managed capabilities with different risk and return profiles, he said.
The internal equity mandates, for instance, have a lower risk and return targets with lower fees.
“At the same time, we do also employ multi-strategy funds using external specialists that will have a higher performance target, including more risk and higher fees,” Petalas told AsianInvestor.
Hong Kong-based FountainCap currently has eight analysts, with one more joining before end of the year, and is aiming to open a new Shanghai office next year to support business growth while enhancing its on-the-ground research.
“We have a long-only strategy that employs a buy-and-hold, high-conviction approach since the strategy inception in 2015. Our average holding period of companies is between three to five years on average and the overall portfolio average turnover rate has stood at 35% since inception,” Steven Luk, CEO of the asset manager, told AsianInvestor.
He said the firm has captured growing interest from investors globally which has brought a rapid increase in its assets under management (AUM).
“AUM grew rapidly and as of the second quarter of this year, we’ve reached $1.5 billion under management with 90% of AUM generated from institutional investors,” Luk said, adding that it's not been an easy year for managers given the continuous regulatory crackdown on sectors including property, technology and online education over the past year.
“We tend to avoid companies which are trading at a high valuation without high-quality sustainable earnings growth, we tend to avoid unprofitable companies and prefer companies with a demonstrated widening economic moat and we tend to avoid companies that are too close to the government,” Luk said, adding that this strategy had helped the fund negotiate difficult headwinds throughout the year.
“The investment discipline we follow has helped us navigate these turbulent times. We were underweight in sectors such as internet, education, and property which helped us get through a volatile period,” he added.
The firm, he said, has long been a fan of consumption plays.
“We currently see many investment opportunities within the broader consumption sector as well as traditional industries such as high-end manufacturing, which are set to offer sustainable growth opportunities over the next three to five years,” Luk said.