China’s National Council of Social Security Fund (NCSSF) is inviting overseas investment managers to submit proposals for three active equity mandates for its reserve pension fund, the first time it has invited non-Chinese fund houses to do so in at least five years.

The move underscores the mounting pressure on institutional investors to find alpha, consider responsible investing, and diversify assets into different areas.

NCSSF is asking fund houses to offer proposals for its first-ever global responsible investing equities mandate, a Japan equities mandate and a global technology equities mandate for the Rmb2.24 trillion ($327.3 billion) reserve National Social Security Fund (NSSF). An investment manager can submit bids for all the three mandates, according to an announcement released by NCSSF.

The announcement was relatively sparse on detail and did not mention the potential size of the mandates, how many fund managers it would appoint, or offer any detail about investing perimeters or return expectations. "I have asked the exact same questions as you," the head of institutional client coverage for a European fund manager told AsianInvestor. 

However, the investment head of a second international fund manager told AsainInvestor that it is likely that successful fund manager applicants will get between $100 million and $300 million for each mandate, while the institutional sales head of a third international fund house put the likely mandate size at between $100 million and $200 million. 

In addition, there will likely be three to five managers per mandate, and NCSSF will probably not put the same manager on all three mandates, even though it said fund houses can apply for all three. The terms of the mandates are expected to be between three to five years, said the investment head on condition of anonymity. 

The last time that NCSSF gave out overseas mandates was in 2015, and the tenders were made in private, he said. 

Despite the excitment of a set of requests for new mandates being issued after five years, industry participants said it would be unwise to read too much into the move. The second investment executive said the state pension fund overseer is unlikely to offer more mandates for public markets in the near future, although it is possible that it will do so with private market request for proposals (RFPs). 

Even that would require a change in its investment guidelines, as NCSSF is not currently allowed to invest in overseas alternative assets. It puts money into only domestic alternatives but the organisation is under a lot of pressure to make changes in this area, the second executive said.

 

“It’s an important RFP for the industry. But the overall Chinese institutional business has not growth much in the past 10 years. The majority of the assets are still coming from big three public institutions of NCSSF, CIC (China Investment Corporation) and SAFE (State Administration for Foreign Exchange)...NCSSF’s RFPs are good for the industry but does not mean there will be more new RFPs coming out of China soon,” added the third executive.

NCSSF did not immediately reply to emailed questions on the request for proposal, sent over the weekend. 
 
EXPERIENCED MANAGERS REQUIRED
 
So far, NCSSF has only officially stipulated that investment managers who are keen to apply should have at least $5 billion of assets under management and have been in business for at least six years, in addition to sound governance structures and quality internal control systems.

The deadline for submissions is this Friday (September 11), and representatives from fund managers looking to apply told AsianInvestor that they expect more details of each mandate to become clear shortly after that date. 

While the three new mandates might not lead to an array of new business opportunities from NCSSF itself, its decision to offer assets to international fund managers after such a long absence is still a potentially important step, particularly at a time when the Chinese authorities are opening up the country’s local asset management industry to more competition.

It’s also noteworthy that all three RFPs are for active equities, which sit broadly in line with majority of public asset searches from key institutional investors this year. Fixed income rates are now low and as the market is expected to be turbulent, active strategies are expected to generate stronger alpha, he added. 

The second executive said most insitutional investors are in China are favour of active strategies. He added that the focus of the three mandates was not that surprising. NCSSF has been considering a Japan equities mandate for the past two years, while the pension fund provider is always looking to build sector exposures in technology, healthcare and infrastructure, he added.

The inclusion of a responsible investing mandate indicates NCSSF is joining the broader movement of institutional investors on this front, and may potentially become a standard bearer for  driving environmental, social and governance (ESG) investing in China. This ESG dedicated mandate should help serve that purpose, but some market observers believe it’s still too early to tell about the success of this mandate.

“We still have to see what managers are hired and the execution of the mandate,” Nana Li, the research and project director for China at Asian Corporate Governance Association, told AsianInvestor.