Washington State Investment Board (WSIB) could become the next foreign pension fund to hand out A-share mandates to external managers, in spite of the growing economic and political headwinds pushing back against US asset owners charting a course to China.

With $135 billion under management, WSIB is in the process of completing an emerging markets public equity manager search.

As part of that, it will consider potential mandates focused on China, perhaps with access to China A-shares, a company spokesman told AsianInvestor, underlining the still-irresistible, if increasingly unsteady, migration of Western portfolio capital into Chinese assets.  

WSIB expects its staff to present recommendations to the board later this autumn before making any decisions on the total estimated size of the mandates and the number of managers to be picked, he said.

To date the pension fund has taken a fairly relaxed approach to China's local equity market. The spokesman noted that its candidate external equity managers can access A-shares if they wish. However, with its new plan WSIB appears to be willing to more specifically consider investing in the market.

In its emerging markets equity management search document, the fund said that it prefers candidate firms with the ability to manage portfolios against a broad benchmark such as the MSCI Emerging Markets Investable Market Index. But it will also consider mandates focused on China with access to China A shares, in which case mutually agreed upon benchmarks will be used, it said.

Other highlights of the mandates plan:

  1. The average annualised total return of the portfolio (net of all fees) is expected to exceed the benchmark by 200 to 300 basis points or more over a full market cycle.
  2. The emerging markets equity product must be long-only and retain liquidity.
  3. The desirable candidate firm should have a total of at least $500 million in such products managed for institutional investors.
  4. Candidate firms are scheduled to make presentations to the WSIB public markets committee on September 10.
  5. Successful manager(s) will be expected to start their duties on or before December 31 when the assets are transferred or invested.

WSIB manages globally diversified portfolios with long-term investment strategies that serve 17 public employee retirement plans, 18 other public trust funds and more than 500,000 US public employee beneficiaries.

Its total investment exposure to China is estimated at $3.5 billion. This China exposure represented about 2.6% of its total AUM as of March 31.

GROWING INTEREST

WSIB’s mandates plan comes as the Alaska Retirement Management Board (ARMB), which oversees investments for the US state’s public-sector pension schemes, told AsianInvestor last month that it is mulling hiring one or more fund houses to manage its first dedicated portfolio of China A-shares.

ARMB has spoken to several asset managers about creating an A-share portfolio. At least two fund houses – Allianz Global Investors and Schroders – have presented to ARMB on A-shares.

The two US pension funds could be joining a growing list of international asset owners moving to boost their exposure to mainland Chinese stocks, or exploring whether or how to do so, amid the prevailing US-China tensions and renminbi weakness. The China currency has depreciated 2.4% since end July 2019 and fallen below Rmb7 to the US dollar. 

Asset owners' A-share interests grew stronger after MSCI introduced a small weighting of A-shares into its closely tracked emerging markets index in June 2018. It subsequently announced its plan to incrementally lift the weighting of China A-shares in the index to 3.3% by November this year.

Global funds have continued to flow into Chinese financial institutions since MSCI’s first announcement, though the fund flows have not shown a linear upward trend. (see table below). The addition of RMB government and policy bank debt to the Bloomberg Barclays bond index in April has also helped to attract more foreign investments.

 

Q3/18

Q4/18

Q1/19

Q2/19

Net inflows (Rmb, bn)

1.75

14.77

5.14

10.13

Source: State Administration of Foreign Exchange

“The appetite [for global asset owners to invest into China] is still here but generally [they] would be more cautious on the risk and potential downside. Thus, the decision making process may be longer,” Janet Li, wealth business leader for Asia at Mercer, told AsianInvestor.

Foreign investors over time are going to put much higher amounts of money into China onshore equities, irrespective of what are seen in terms of trade tensions and slowing economic growth, Alexander Treves, investment specialist for emerging markets and Asia Pacific equities at JP Morgan Asset Management, told AsianInvestor.

“China increasingly will become a non-discretionary asset class. People will have to have a view on it,” he said. “It’s too big to ignore.”

And to gain exposure to China A-shares foreign asset owners are inclined to giving out mandates to external managers rather than investing into them directly.

“Not every institution is equally advanced in it. In parts of Asia and Europe, there may be some institutions that are a bit more advanced, potentially in the [United] States there is a wider range of sophistication, if I can use that word,” Treves said.

Investors interested in the strategies of China’s asset owners can learn more at AsianInvestor's sixth Institutional Investment Forum China on September 18 in Beijing. Please click here for more details.