National Council for Social Security Fund (NCSSF), the manager of China’s National Social Security Fund, is re-evaluating the managers who run its foreign investment mandates and could potentially replace them if their performances do not to improve, a source familiar with the matter told AsianInvestor.

This re-evaluation has been happening since the start of 2017, the source said, and comes after the NCSSF shrank its overseas allocation last year due to performance concerns, as identified by AsianInvestor in June.

The $291 billion reserve pension fund has at least 37 foreign firms running foreign assets. In the most recent round of offshore mandates – issued in December 2015 – it handed portfolios to Amundi and Vanguard and the Hong Kong arms of China's DaCheng and China Universal.

In view of the renminbi's depreciation -- although the currency has steadied so far this year, it is down lost more than 10% of its value in the last two years -- “every investor in mainland China wants to invest overseas,” the source said. But under the current capital control environment, a government entity such as NCSSF is unlikely to go against the State Administration of Foreign Exchange by issuing new overseas mandates with additional money, rather than sticking with its existing overseas assets and trying to achieve the best return possible, the source added.

In contrast, Taiwan’s Bureau of Labor Funds is not considering changing its overseas managers. Although some markets, like emerging-market debt, are difficult and some managers have slightly underperformed benchmarks, that’s accepted, a senior investment executive at BLF told AsianInvestor. In part, that's because the cost of changing managers is high, said the individual.

As of end 2016, among the 14 different types of overseas mandates awarded by BLF, only six posted negative aggregated returns: the global bond, global enhanced bond, global EM equity, global EM bond, global credit, and enhanced Asia-Pacific equity mandates.

However, other asset owners share NCSSF’s hardening attitude.

Janet Li, director of investment, Greater China at consulting firm Willis Towers Watson, told AsianInvestor that some of her firm’s asset owner clients in the greater China region are now thinking of replacing their overseas mandate managers because they have “reached their tolerance levels”.

“If the public equity and bond managers are not able to turn the performance around, I suppose that would [bring about] a bit of the replacement activities in this year,” she said.

Dissatisfaction spreading

Li said Willis Towers Watson had advised clients to be patient, to monitor managers for a period of time before taking any action, because according to the firm’s own research even the most skilful managers sometimes underperform.

Some clients were nonetheless still seriously considering changing managers, she said, because the period of underperformance had been long enough in some cases in the last couple of years.

Li had some sympathy for managers because the market was difficult and the philosophy of a lot of managers was to focus on the fundamentals, so the stocks they picked were undervalued and had growth potential. But in the past two years prices have been driven more by momentum, meaning more fundamentally driven managers have suffered, she said.

“But probably the managers have to review their philosophy of process from time to time to see how they can keep up with the market changes, and to make sure their approaches keep abreast of time,” Li suggested.

Asset owners might not necessarily replace their managers in the end, she added, but they are definitely looking for potential alternatives and are more open to discussion with other possible candidates.

“Some of the less brand-name managers that are more specialised in certain asset classes might be the ones who can really deliver the alpha in the asset class," Li noted. "This is perhaps the types of managers that clients would have interest in."