Market tries to interpret new NCSSF debt mandates

China’s social security fund has reportedly issued eight onshore credit mandates. It may be hedging aggressive expansion, or it may preface renewed exposure to risk assets.
Market tries to interpret new NCSSF debt mandates

China’s social security fund may be looking to hedge its aggressive recent expansion after reportedly moving to award eight onshore mandates for local corporate and institutional credit bonds.

Then again, investment into long-term onshore credit may also be a necessary step before the National Council for Social Security Fund (NCSSF) ramps up risky allocations again, muses Francois Guilloux, regional sales director at consultancy Z-Ben Advisors.

In all, 18 institutions are understood to be in the running for the debt mandates, which amount to Rmb8 billion ($1.3 billion) overall, with instructions to build debenture-based portfolios for selection by NCSSF, which in May picked up AsianInvestor's Institutional Investor of the year award.

At about Rmb1 billion each, the mandates will be locked for five years, with a 30% return as a target for the period, according to local media.

Only last week, Harvest Fund Management received approval for a bond fund investing in exactly these types of instruments. “In China, timing is everything,” reflects Guilloux.

NCSSF’s stated position has been to increase dedicated offshore offerings. At the end of last year the fund had Rmb857 billion in assets under management, of which 42% is being invested by third-party managers.

This June, the NCSSF invited overseas managers to pitch for a particularly flexible round of offshore mandates in four new categories: emerging market bond, multi-asset allocation, global resources active equity and global real estate active equity.

The fund has been increasing its exposure to stocks and private equity rapidly recently, so a move into the less volatile (although relatively immature) onshore debt market could be a way to hedge such aggression, says Guilloux.

At Rmb8 billion, the scale of this investment would be less than 1% of NCSSF’s total portfolio, he adds, noting that NCSSF may simply be seeking to round out its fixed income exposure.

Timing may also explain NCSSF’s move. Returns on local corporate debt are above most domestic bond yields by 150-200 basis points, with an average maturity of three-to-five years. Market concerns have also forced recent issuances to offer even higher yields of up to 8%.

But returns on these investments are still well below what the fund needs to earn, Guilloux says. “Additional moves towards higher-return assets are all but inevitable in the coming year.”

He adds that by treating its external mandates as silos, methodically moving into new asset types by utilising a number of different managers, it appears NCSSF is striving to make benchmarking different managers as easy as possible.

The fund has issued similar mandates over the past 18 months, he points out, and looks to be moving towards more of an autopilot approach than many institutional counterparts, notably China International Corporation.

“Specialising in its manager selection capabilities may very well be a higher priority [for NCSSF],” says Guilloux.

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