China’s social security fund has invited overseas managers to pitch for what is seen as its most flexible round of offshore mandates yet in a sign it is becoming increasingly aggressive.
These mandates fall into four new categories: emerging market bond, multi-asset allocation (targeted for the highest return levels, with appropriate risk management), global resources active equity and global real estate active equity.
The latter two categories mirror qualified domestic institutional investor (QDII) trends among domestic firms and suggest the National Council for Social Security Fund (NCSSF) is keen to gain exposure to a variety of different inflation hedges, notes consultancy Z-Ben Advisors.
Emerging market bonds are another first for the fund, while the multi-asset portfolio is defined as including bank deposits, treasuries, offshore RMB bonds, money market tools, equities, fund products and derivatives.
“Recipients of this type of [multi-asset] mandate appear to be able to utilise a wide variety of allocations, as well as an ability to employ the tools necessary to hedge risk,” says Francois Guilloux, Shanghai-based regional sales director at Z-Ben. “This type of allocation is, in no small part, the institutional management equivalent of a blank cheque for product design.”
The last round of offshore mandates from the NCSSF, which in May picked up AsianInvestor's institutional investor of the year award, was announced in March last year and consisted of a far more orthodox set of targets. Historically its offshore portfolio has comprised vanilla offerings such as developed market equities, emerging market and regional equities and money market funds.
The NCSSF is seeking to grow its offshore allocation from approximately 7% of assets to 20%. Based on its total AUM of Rmb856.7 billion ($132 billion) at the end of 2010, which is expected to grow to Rmb1.5 trillion by 2015, the opportunities for foreign managers appear substantial.
Assuming a commensurate increase in offshore investments, Z-Ben expects the new mandates to amount to $6 billion, although the total size and number are not specified in the announcement, which was posted on the NCSSF website on Wednesday night.
Guilloux suggests the move for NCSSF to become more aggressive and diversify its offshore portfolio comes as little surprise, given that the fund has endured some criticism that its returns were not keeping pace with inflation.
Fighting inflation has become Beijing’s primary concern. Despite four interest-rate hikes since October, the country’s CPI still stood at 5.3% in April. That is expected to accelerate to 5.5% in May, according to a median forecast of economists in a Bloomberg survey.
“Although NCSSF’s 2010 return figures [4.23%] compare favourably against domestic markets [down 12% in the year], the same figures hardly stand up against the new inflation numbers, underscoring the need for more aggressive allocations,” adds Guilloux.
The NCSSF has invited foreign managers to submit RFPs no later than July 8. Candidate firms must have over six years’ asset management experience and AUM of at least $5 billion. A requirement introduced in May stipulates that candidates must also have a performance record of more than three years in a similar product.
In the EM bond category, NCSSF expects managers to invest in investment grade emerging market local currency bonds, benchmarked against the JP Morgan Emerging Market Bond Index Global Diversified.
For global resources active equity, managers are required to adopt the MSCI World energy index (50%) and the MSCI world metal and mining index (50%) as benchmarks. The NCSSF also allows managers to invest in securities beyond this scope, such as raw materials, agriculture and utilities stocks.
For global real estate active equity, managers are expected to invest mostly into property related stocks covered by FTSE EPRA/NAREIT Developed index, although securities outside the scope of the benchmark will be allowed.
Given the specific investment targets that NCSSF is now interested in, “we suspect that specialist managers will have a much better chance than in the past of receiving a mandate”, concludes Guilloux.
“Potential long-term growth, combined with the fact that having such a mandate makes for an important institutional calling card in China, means that this round of proposals will be as competitive as ever for interested offshore managers.”