First China PPF mandates herald NCSSF diversification push

The public pension fund scheme is set to see its investment scope widened to include private and foreign markets, as asset managers are about to receive their first equity allocations.
First China PPF mandates herald NCSSF diversification push

The National Council for Social Security Fund (NCSSF), which manages China's state pension assets, is poised to hand out the first equity mandates on behalf of the country's new public pension fund (PPF) scheme, reports state media.

And the move to is set to herald the start of a broader diversification drive, AsianInvestor can reveal.

The government is also thinking about expanding the PPF's investment scope to private and overseas markets, said a senior researcher at the Ministry of Human Resources and Social Security (MoHRSS), which oversees public pension funds.

Wider scope

To boost PPF returns, in August 2015 provincial retirement assets were brought under the aegis of the NCSSF and their investment scope widened to include public equities, with a 30% allocation cap. Until then they could only invest in bank deposits and bonds. In addition, the $276 billion NCSSF in December named 21 domestic houses* to help manage the new scheme.

Further appointments and reforms are expected.

“Whether it’s equities or bonds, they are still traditional and domestic investments," said the government researcher. "What we are studying now is the possibility of further expanding PPF investments to private and overseas markets."

This reflects the NCSSF's plan to expand its own offshore allocation.

Currently, the NCSSF’s overseas allocation is limited to 20% of total assets, but it will likely want to increase that percentage, said the Asia-Pacific head of a large fund house. He noted that the NCSSF can only invest in public markets (stocks, bonds, money market funds, securities investment funds, and, for the purposes of risk management, financial derivatives).

Moreover, NCSSF can only invest in domestic private equity, although it could yet amend its investment guidelines to allow it to enter overseas private markets to better diversify its portfolio and enhance returns, the Hong Kong-based executive told AsianInvestor.

That said, the pension fund has since the start of this year been re-evaluating the managers that run its foreign mandates and could replace them if their performance does not improve, a source told AsianInvestor earlier this month.

Debut equity mandates

With regard to the PPF, NCSSF will assign money this week to managers for the first batch of investments under the new scheme, according to the state-owned Securities Times. These will be equity allocations, specifically value-equity and enhanced-index strategies, totalling Rmb10 billion ($1.45 billion).

This represents a small percentage of the total PPF assets and shows they are being cautious, said Lin Zhu, a Shanghai-based analyst at consulting firm Red Pulse.

MoHRSS vice minister You Jun said earlier this month that PPFs from seven provinces and cities, including Beijing and Shanghai, had handed pension assets worth an aggregate Rmb360 billion to the NCSSF to run. That means that up to Rmb108 billion could be invested in equities, equity funds, balanced funds and equity-type pension products, given the 30% limit on equity-related instruments.

The NCSSF could not be immediately reached for comment for this story. 

In a research note at the end of December, brokerage firm China Securities said the equity investment style of the PPF schemes was likely to be similar to that of the NCSSF, which favours mid-cap stocks with low valuations, high dividends and strong profits. 

* Of the 21 managers selected for the PPF mandates, 14 are domestic fund managers: Bosera, ChinaAMC, China Merchants, China Southern, China Universal, DaCheng, E Fund, Fullgoal, GF Fund, Harvest, HFT, ICBC-Credit Suisse, Penghua and Yinhua.

NCSSF has also hired three annuities/pension managers (Ping An Annuity, China Life Pension and Changjiang Pension), three insurance investment arms (Taikang Asset Management, PICC AM and Huatai AM) and one brokerage (Citic Securities).

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