China’s biggest pension fund returned just 1.73% in 2016 amid lacklustre domestic stock markets and is looking to make substantial changes to its portfolio and strengthen its in-house capabilities.

Last year’s performance was the worst since 2012 for the National Council for Social Security Fund (NCSSF) and a startling drop from the 15.19% it achieved in 2015. The latter figure had been the highest return for six years. 

Lou Jiwei, NCSSF’s chairman, attributed the decline to the loss in domestic equity markets, according to a speech made at a board meeting on May 9 and posted on the fund’s website.

He also listed investment plans that are on NCSSF’s agenda this year: further exploring funds of funds and high-dividend domestic stocks; building up its global bond investments; gaining permission to invest in overseas private equity; and expanding the range of underlying assets its in-house index team invests in.

Despite the fall in return, NCSSF’s assets under management rose 6.7% to Rmb2.04 trillion ($293.7 billion) in 2016, down from the 17.2% increase in 2015. And, since inception in 2000, the fund has posted an average annual return of 8.37% as of end-2016. 

Domestic assets accounted for 93.34% of AUM as of end-2016, while the 6.66% foreign asset allocation was up slightly from 5.93% as of end-2015. However, the value of NCSSF’s foreign investments increased 20% to Rmb136 billion in renminbi terms and 12% in US dollar terms, after the yuan weakened against the greenback last year. 

Of the total assets as of end-2016, 46% were managed in-house and 54% by external managers, a proportion little changed from a year ago.

Seeking new investments

In Lou’s speech, he admitted that the tough economic and financial environment had led to greater pressure to preserve and increase the value of the fund, and had made risk management particularly challenging.

“The board of directors needs to improve the investment management capability and investment decision-making efficiency,” he said.

NCSSF’s investment return in 2015 was largely driven by its exposure to direct stakes in domestic companies stocks and private equity funds, both of which contributed even more income to the fund last year; Rmb18.6 billion, up from Rmb15.2 billion in 2015.

However, the fund’s income from the fair value of tradable assets suffered a loss of Rmb59.7 billion in 2016, after recording a profit of Rmb5.6 billion in 2015.

To cope with the changing market environment, Lou said NCSSF would broaden its investment scope to incorporate new financial instruments and investment strategies.

In overseas markets, the fund will seek permission to invest in foreign PE funds. The fund can invest up to 20% of its portfolio in foreign assets, but not in direct stakes or PE funds. It will also broaden its range of overseas fixed income products and increase its exposure to such assets. 

Domestically, the institution will explore making more use of funds of funds to invest in healthcare, currently a very popular sector in China.

NCSSF was said at the end of last year that it was setting up a separately managed fund-of-funds (FoF) portfolio whereby it will invest into products managed by investment firm China Everbright.

For domestic equities, the fund will employ a prudent strategy focusing on long-term value and high dividends, amid the low-return and high-volatility environment, Lou said.

In addition, the fund will continue to improve its in-house index investing capabilities and seek to expand the range of underlying assets for index investing. NCSSF did not say which indexes it invested in or whether it invested in overseas exchange-traded funds.

Institutions struggling for yield

Asset owners in Greater China region have been tolerating poor performance from relative-return driven asset managers for a long time but are now increasingly reviewing their portfolios, a Hong Kong-based investment consultant told AsianInvestor.

She added that they were considering switching the benchmark-driven part of their portfolios into passive investments and employing absolute-return strategics for more of their actively managed mandates.

For instance, Cathay Life, Taiwan’s biggest life insurer, said earlier this year it was seeking fund houses for absolute-return mandates investing in developed-market government bonds, in a move to cut back on benchmark-driven strategies.

Largely due to the poor performance of A-shares, big Chinese asset owners all posted lower investment returns last year. China Life, the largest Chinese insurer with $353 billion under management, saw its gross investment return fall to 4.56% from 6.39% in 2015. The second largest insurer, Ping An Life, returned a gross 5.3%, down from 7.8%. 

Even Asia's most sophisticated and well established investors have been hit hard in recent years. Singapore sovereign wealth fund GIC's five-year annualised performance fell to 3.7% in the year to March 2016 from 6.5% as of the previous March.

Lower PPF expected returns

Meanwhile, Lou said the expected return of the new public pension fund (PPF) scheme, which incorporates mandates handed to NCSSF by individual provinces, will probably be lower than that of the main national fund.

That’s largely because the public pension funds will face regular withdrawals, so they must have higher liquidity requirements, said Lou. In addition, the provincial governments that hand mandates to NCSSF require guaranteed returns, so the latter will be more cautious in respect of PPF investments.

Moreover, PPF portfolios’ fixed income allocations will be higher than that of NSSF and are prohibited from investing in PE funds and overseas assets at present, Lou added.

As of end-April, NCSSF had received mandates from seven provinces and municipal authorities, for a total of Rmb360 billion ($52 billion), of which it has received Rmb137 billion

NCSSF did not respond to requests for comment by press time. 

NSSF annual investment returns since inception
Year Investment return (%) Inflation (%)
2000 NA NA
2001 1.73 0.70
2002 2.59 -0.80
2003 3.56 1.20
2004 2.61 3.90
2005 4.16 1.80
2006 29.01 1.50
2007 43.19 4.80
2008 -6.79 5.90
2009 16.12 -0.70
2010 4.23 3.30
2011 0.86 5.40
2012 7.10 2.60
2013 6.20 2.60
2014 11.69 2.00
2015 15.19 1.40
2016 1.73 2.00

Source: NCSSF