NSSF and ADB in consultant search for offshore investment

Meanwhile China''s social security funds manager is selecting a new set of domestic external managers.

China's National Social Security Fund is working with the Asian Development Bank to select an investment consultant to assist with offshore investing and risk management. The ADB has solicited bids from five consultants, and has already ranked them according to technical and financial points, says Ying Qian, principal first economist at the ADB in Manila. Next the ADB will enter contract negotiations, a process that should conclude by the first week of October, after which the six-month project will commence.

This technical project, valued at $720,000, marks an ongoing collaboration between the ADB and the NSSF's National Council. Two years ago, the ADB selected a consultant to help the NSSF establish investment policy and determine its liabilities, and to work on domestic outsourcing.

That work was done by Canada's Caisse de Depot et Placements du Quebec, itself a pension fund. CDPQ has since exited the consulting business but its consultants have spun off into a group called Financial Market, which is now bidding for this new mandate. (CDPQ also used State Street Global Advisors as a sub-advisor.)

The other bidders include heavy hitters such as Mercer Investment Consulting and PricewaterhouseCoopers. A British firm, Cadogan, is also bidding, as is a small American firm, Pine International, which is teaming up with Russell Investment Group for this mandate, as Russell lacks a consulting presence in Asia ex-Japan.

The NSSF's assets are now estimated to be Rmb140 billion ($17 billion) by market sources, gained in part from proceeds from Chinese companies' international IPOs, although the size of the NSSF's existing offshore assets could not be determined.

Ying says the tender has three components. First is to design a strategy for overseas investment, including how to select a custodian and global fund managers, as well as a risk management system. (The NSSF is current a client of Barra's.) In particular, the consultant will need to review documentation, which has been a problem in the NSSF's domestic experience (see below). Ying says this should target only the NSSF's existing foreign assets, as the government isn't ready to adopt a Qualified Domestic Institutional Investor scheme.

The second component deals with whether the NSSF should manage non-tradable state-owned shares. The NSSF is keen to do this because it knows it cannot rely on handouts from the Ministry of Finance, and because foreign investors' objectives have limited its ability to raise money through global IPOs. The NSSF is thinking about a mechanism to gradually release state-owned shares to the market, akin to the Tracker Fund ETF established by the Hong Kong government in 1999. But some analysts are sceptical about a social security organization also becoming a state asset management company, and worry about potential conflicts of interest. This tender will require the consultant to determine if such a policy is feasible and outline how such a strategy could work.

The third and smallest component of the mandate is to review the NSSF's information technology platform and determine what it needs to handle an expanding investment program.

Meanwhile, the NSSF continues to expand its domestic outsourcing scheme. Having now provided six domestic fund managers with two tranches of money, it is reviewing an additional list of 29 fund houses and securities companies for a third tranche totalling up to Rmb4 billion ($480 million), according to one fund management executive in Shenzhen.

The NSSF is looking at 17 fund managers and 12 securities companies, none of which include the original six it has used. This is the first time that brokers or Sino-foreign fund management JVs have been qualified to bid. Shenzhen-based execs anticipate eight or nine mandates to materialize, mainly for domestic equities. Among the JVs bidding are BNP Shenyin Wanguo, China Merchants Fund Management (ING's JV), Fortis Haitong, Guotai Junan Allianz, Invesco Great Wall, SG Fortune and Xiangcai ABN Amro.

The NSSF remains the only institution to be allowed to give mandates for discretionary accounts in China. Expanding the pool of players will spread the investment management industry's experience with handling accounts. The first two tranches have not performed well, however - mainly because the stock markets have been poor, but also areas like documentation need to be worked out better.