California State Teachers’ Retirement System may buy stakes in asset managers and other partner firms in Asia as its focus on the region rises, its deputy chief investment officer Scott Chan has told AsianInvestor.
The $234 billion pension scheme decided last month to implement a plan – dubbed its ‘collaborative model’ – to heavily ramp up the share of its portfolio managed in-house or via co-investments.
In distant markets such as Asia, Calstrs will continue to outsource investing to external firms, Chan said during an interview last month*. But it will seek to implement the new model to the extent it can do so.
“I’d like to see our senior team travel more to Asia to develop more of a knowledge base to then develop this partnership approach,” he said. “So it’s learning and investing together; it’s leveraging the managers that we have there.”
The region is becoming a bigger focus for Calstrs but there are no plans to establish a presence there, Chan added. Indeed, it's thought that no single US public pension scheme has an office in Asia yet, although that may change. The Teacher Retirement System of Texas is looking to put boots on the ground locally.
Ultimately, it would make sense for Calstrs to consider buying into investment firms in Asia, as it has done domestically, Chan said. “When we’re looking to be a little more formal in our partnerships, we might look to partially own some stakes to capture the growth.”
Most of the fund’s listed equity exposure to the region is in line with its global public equity benchmarks, and it is both active and passive.
For the time being, the fund has retained a neutral weighting on Asian stocks and has not felt the need to increase its exposure, Chan said.
Caution is the watchword, particularly in view of the escalating US-China trade dispute.
Still, Calstrs’ China allocation is set to grow as the weighting of mainland A-shares in widely tracked global indices grows, he noted.
He also pointed to opportunities for actively managed strategies in Chinese stocks, given the retail-heavy nature of the market.
Chan said he would also like to capture the Chinese market growth as it becomes more institutionalised thanks to greater foreign inflows and as the pensions industry matures. Again, he envisages doing so by partnering with asset managers, including joint ventures.
That reflects a rising trend for Western asset owners to explore whether, and how, to add mainland equities exposure. For instance, Coal Pension Trustees, which manages the UK’s two legacy coal industry retirement funds, earlier this year chose two firms to run its first dedicated A-shares portfolio.
On the fixed income side, Calstrs has a US-oriented bond benchmark with little Asian exposure, Chan said, though it regularly reviews whether it should change the benchmark and increase its risk level.
The fund’s Asian private markets exposure is also fairly small. Only 6% of its real estate portfolio is in the region, largely in Australia and Japan, and 7.5% of its private equity portfolio is in Asia.
Any increase in illiquid asset exposure depends on the opportunities, Chan said. Calstrs will be looking to increase its understanding of the risks and opportunities in China and other Asian markets, he added, given how they’re evolving.
How the US-China trade dispute evolves will affect how Calstrs progresses in Asia. US President Donald Trump is threatening tariffs on $300 billion-worth of Chinese imports on top of the 25% already being levied on $250 billion of goods.
Chan said: “We would be concerned about the trade tensions escalating into something longer term with much greater ramifications, akin to a Cold War between the US and China."
*A longer article based on this interview with Scott Chan will appear in the upcoming (Summer 2019) issue of AsianInvestor magazine. In addition, look out for an article on AsianInvestor.net about Calstrs’ multi-faceted revamp of its portfolio management.