China's $9 billion National Council for Social Security Fund (NSSF) in Beijing has made its first mandates of pension money to domestic fund managers, awarding 11 equities and fixed-income deals to six houses.
Shenzhen-based Boshi Fund Management, Penghua Fund Management and Nanfang (Southern) Fund Management and Beijing-based Changsheng Fund Management and Huaxia Fund Management each won a Rmb1 billion equities and Rmb1 billion fixed-income mandate, while Jiashe Fund Management in Beijing won a Rmb1 billion fixed-income mandate.
The selection committee allowed only the original 10 fund management companies to pitch, as it required a two-year track record. That left Shanghai's Huaan Fund Management in the cold. Huaan, the first to launch an open-ended mutual fund and considered the number-one or number-two domestic fund manager, was widely expected to clinch a berth.
Other losers are Beijing's Dacheng Fund Management and Shanghai's Fuguo (Fullgoal) Fund Management and Guotai Fund Management.
The failure of any Shanghai firms to secure a mandate has sparked a lot of rumours, given the government's desire to build Shanghai as a financial centre, but a source close to the selection committee says talk of an anti-Shanghai bias is nothing but hot air. He says the committee was not only professional but sensitive to any accusations of politicking.
The NSSF did not itself select managers, but relied on a committee including representatives from the NSSF, the Ministry of Finance, the China Securities Regulatory Commission (CSRC), the Ministry of Labour and Social Security, and ‘domestic experts' drawn from industry and academia. Although the NSSF is not bound by the committee's recommendations, in this case it did not want to make subjective decisions. This is a highly sensitive experiment. The level of detail required by the selection committee was intense, leaving the NSSF with little reason or incentive to digress.
The 10 firms pitched to the committee at an isolated retreat outside Beijing over a three-day period in mid-December. They were asked to provide an unusual amount of information regarding their methodology, investment philosophy, systems, risk management tools, mutual fund track records, personnel and products. Although no one outside of the committee knows why Huaan or the others failed to make the grade, it is believed these firms simply did not provide sufficient written detail. Another view suggests Huaan's proposal for the equities mandate was too aggressive for NSSF's risk appetite.
Moreover, while in the future the NSSF is expected to shortlist candidates for future bids, the limited number of players meant that all 10 firms were invited to pitch the committee.
Information remains scarce because the NSSF is refusing to comment on the process. Some domestic managers who won mandates declined to discuss it because they had been asked by the NSSF to remain silent.
The NSSF is in a tricky situation and so is keeping as low a profile as possible. Industry sources praise its young, technocratic management as being open to international practices and eager to establish the fund. But any losses on outsourced assets are sure to generate potshots from critics and jeopardize the project.
An important result of the awards is not only that China's biggest institutional investor is moving quickly to organize and put its pilot national pension scheme on track, but that it is pioneering specialized mandates.
Equity mutual funds by law are actually balanced, with a minimum 20% of fixed income. But the NSSF plumped for a more sophisticated asset allocation strategy. The fixed-income mandates are to be fully invested. The equities mandates can be 100% invested in A shares, but managers have been given leeway to invest up to 40% in cash or bonds, so they can time the market. But one fund manager says overall the NSSF is not keen to see its managers trading in and out.
This reflects views from foreign advisors such as Caisse de Depot et Placements du Quebec, Northern Trust, Principal Global Investors and State Street Global Advisors.
To make this work, the NSSF had to create a benchmark. There is no single public index in China that incorporates stocks listed in both Shanghai and Shenzhen, and creating one remains a controversial, if necessary, move.
Instead a local, independent consultant will maintain a customized index based on the NSSF's own methodology that includes all listed shares. Industry players believe this is Tianxiang Services, a Beijing-based data warehouse that collects pricing data on A and B shares, and is affiliated with former CSRC chairman Liu Hongfu.
This benchmark is also adjusted for free float. The benchmark is a touchy matter for NSSF, because it doesn't want to be accused of favouring a company, region or industry. So its benchmark is essentially the free-float adjusted A-share universe.
Some experts believe the NSSF may switch indices if the stock exchanges create a public, unified one that is also adjusted for free float.
On the ever-fascinating topic of fees, no one would comment, except to say the fees are lower than a retail mutual fund's, which average 150 basis points.
Industry players say if these first mandates are a success, the NSSF will release more funds, probably next year. The current mandates will be formally reviewed in one year. Over the next year or so, the pool of eligible managers will expand, including new players as well as Sino-foreign joint ventures, if the two-year track record requirement is relaxed. Some foreign managers hope that, if the NSSF is comfortable with these mandates, that in two years or so it will invite foreign firms to pitch for international business.
In the meantime, these mandates should be a boon to those domestic managers that won, not only for the business but for the prestige. Moreover, it is hoped this will encourage other domestic institutions to consider specialist mandates.