China’s national reserve pension fund announced a return of 15.14% in 2015, largely driven by its exposure to direct equity investments and private equity funds, which are set to grow further. 

This represented the National Council for Social Security Fund's (NCSSF) best performance for six years and boosted its total assets by 17.2% to Rmb1.8 trillion ($276 billion).

This comes as China's State Council on February 5 approved draft rules for NCSSF, which are expected to allow it more flexibility over investments, including allocating more to foreign and private equity assets. The proposals were originally made in November 2014, as reported. The fund currently has 9% of its portfolio invested overseas, up from 8.5% as of end-2014.

Wang Zhongmin, vice chairman of NCSSF, said at a conference in Beijing on February 20: “Looking back at our experience amid market changes and volatility, we have proactively allocated to direct [equity] and private equity investments. We are increasingly using alternatives as an effective tool [in asset allocation].”

The fund aims to allocate more to direct stakes and PE funds to improve returns amid market volatility, but Wang did not reveal a target or current allocation to such assets. The move reflects a trend among Asian state institutions to boost their offshore and alternatives portfolios, with Malaysia's Employees Provident Fund and Taiwan's Bureau of Labor Funds two recent examples. (See also accompanying story in today's newsletter, Asian pensions planning to boost alts exposure).

The National Social Security Fund (NSSF) started to allocate to onshore direct equity investments last year. It acquired in 5% of Ant Financial, the financial services arm of e-commerce giant Alibaba, in June, its first direct stake in a privately owned internet finance firm. It also bought 2% of China Orient Asset Management, one of the mainland’s bad debt managers, in January this year.  

NSSF has reportedly invested up to Rmb40 billion across more than 20 PE funds, noted Wang. The fund had said in 2012 it planned to raise its allocation to Rmb50 billion by end-2015.

To achieve further portfolio diversification, NCSSF in November partnered China Communications Construction, a state-owned construction company, to set up a private investment fund focusing on infrastructure projects with initial assets of Rmb15 billion. 

Meanwhile, the newly approved NCSSF rules will clarify its investment scope, including relaxing certain restrictions on overseas investments. The fund can currently invest up to 20% of its portfolio in foreign assets, but not in direct deals and PE funds.

Most of NSSF's offshore exposure is obtained through external mandates, which can only be funded by sales of shares in Chinese state-owned enterprises. The fund issued four new overseas mandates in December, as reported.

Wang did not reveal how much of NCSSF’s Rmb1.8 trillion in assets were accounted for by NSSF, nor details of the mandates it has received from Guangdong and Shandong provinces. 

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

Institutional investors across Asia have been increasingly moving to boost their offshore and alternatives exposure in the past couple of years. Other than Malaysia's EPF and Taiwan's BLF, they include Korea Investment Corporation, Korea Post, Japan's Government Pension Investment Fund, Thailand's Government Pension Fund and various insurance companies.