North American pension funds look to deepen Asia relationships

Home markets no longer provide the ability to meet target returns, but investing in Asia creates new complexities, says Calpers CIO Joe Dear.
North American pension funds look to deepen Asia relationships

Public pension funds in the US and Canada are increasingly looking to establish relationships in Asia that can assist them with finding higher-yielding investments.

The complexity of markets such as China and the diversity of the region makes it difficult to rely on hands-off investment management, and creates challenges from market timing to market access, says Joseph Dear, CIO of the $220 billion California Public Employees’ Retirement System (Calpers).

Dear spoke at the annual Pacific Pensions Institute forum in Asia, held this year in Kuala Lumpur. He notes that Calpers’ annual return target is 7.75%, which it cannot meet solely by investing in low-growth developed markets.

Calpers has responded in a number of ways. One includes building a large weighting to private equity: the fund has $30 billion invested in PE strategies and a further $15 billion of uncommitted capital earmarked for such deals. To date it has invested in $1.3 billion of PE deals in Asia.

It has also built exposures in real estate, infrastructure, inflation-linked assets (such as commodities and inflation-linked bonds) and hedge funds, which includes Asia exposure via funds of hedge funds.

Dear says the fund expects PE to return 300 basis points above public-market equities. Calpers assumes that, with economic growth rates higher in many Asian markets, it should also therefore enjoy those benefits in Asian public and private markets.

“That’s obvious,” Dear says. “What’s not obvious is how to do it.” He cites market timing, partners and local operational issues as challenges to US-based public funds.

The more he visits the region, particularly complex markets such as China, the more confused he becomes. “If you’re not confused then you haven’t begun to understand,” he says.

“Asia represents a vast opportunity set, and we’re trying to reach an understanding of the challenges involved and how to approach them.”

His view is echoed by Doug Pearce, CEO and CIO at British Columbia Investment Management (BCIM), which has an annual investment-return target of 7% and is also looking to emerging markets to achieve that.

He observes that stock-market returns often don’t keep up with Asian economic growth rates. “We need to travel here, build relationships, open offices and work with local partners,” Pearce says of the North American pension fund industry. “It’s hard as an outsider to get in on the best deals. There’s plenty of capital here.”

He says the goal is to work with local partners that share BCIM’s beliefs and ideals, including solid governance, as well as try to offer access to deals in North America. “We need to focus on a handful of relationships and deepen them,” he says.

Dear says US plans should take advantage of their longer-term outlook. This is the advantage that can see an investor through the many complexities of China. The trick is to pick a partner and pick a time to tap the market.

Risk management also plays a greater role. For example, while Calpers may have built a huge private equity portfolio, it has also learned from painful experience of the need to maintain a liquidity cushion, in case markets seize up.

In 2008, in the wake of the Lehman Brothers' bankruptcy, Calpers was forced to sell some illiquid assets to raise cash. Since then it has built a liquidity allocation of around 4%.

It’s a drag on overall performance – but the tactic paid off this past August and September, when Calpers was protected against market volatility and was able to use dry powder to pick up some assets at attractive prices. “You need a big balance sheet, and a long-term view,” Dear says.

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