Volatile market conditions took a toll on the domestic investments of China’s National Council for Social Security Fund (NCSSF) after it reported a 4.2% gain in 2010 compared to over 16% the year before.

The NCSSF, which manages China’s Social Security Fund and last night picked up AsianInvestor's institutional investor of the year award, had total assets of Rmb856.7 billion ($131 billion) at the end of 2010, up from Rmb776.7 billion the previous year.

The vehicle had raw growth of 10% between 2009 and 2010, according to an analysis by Shanghai-based consultancy Z-Ben Advisors, with 4.2% attributed to capital appreciation and the rest to cash and stock transfers from the Ministry of Finance and state-owned enterprises.

Despite the NCSSF’s low returns last year, Z-Ben points out that its compares well to the CSI 300, which lost 12.5%. Large holdings in fixed-income and cash, in addition to offshore mandates, likely helped the fund to reduce its impact from falling domestic markets.

However, the NCSSF is not retreating from the A-share market, as it has reportedly issued Rmb10 billion in new mandates to eight domestic asset management firms, including GF Fund Management and Dacheng Fund Management. 

Of the total, Rmb6 billion will be invested in China equities, while the remainder will be allocated to bonds. Market watchers believe the NCSSF is seeking out underpriced equities, with a view that exchanges will recover in the medium to long term.

“The fund has also shifted some of its existing mandates, and it appears to be much more comfortable with volatility than has historically been the case,” Z-Ben notes.

The consultancy believes the NCSSF is on track to reach its target of Rmb1.5 trillion in assets by 2015, particularly as the fund is taking steps to allocate a growing amount of capital to alternatives. It had favourable returns of Rmb34.9 million from its private equity portfolio in 2010 – the first year it had made allocations to the asset class.

The NCSSF has just 1% of its AUM in private equity in 2010, far short of the 10% maximum permitted under regulations. Z-Ben expects the proportion to rise, noting:  “The fund’s need for better returns, plus the fact that it is well situated to make long-term, less-liquid investments, makes private equity, particularly in non-traditional segments, a natural target.”

An increase in mandates is expected, adds Z-Ben, as the NCSSF diversifies its allocations to maximise returns. The fund is also likely to seek offshore investments to decrease its exposure to domestic market volatility.