Rising global investor enthusiasm to invest into relatively high-growth Asian and particularly Chinese assets is carrying most asset owners along. But the degree to which non-Asian institutional investors, particularly those based in the US, are willing to single out China for this exposure can vary a lot.  

Some US asset owners have been taking circuitous routes to investing into China, choosing to use pan-Asian funds instead of China-dedicated vehicles. Meanwhile a handful of Dutch retirement funds have been actively selling certain Chinese corporate positions.

The Alaska Permanent Fund Corporation (APFC), a US sovereign wealth fund with $76.3 billion assets as of May 20, recently targeted Asia, but not China specifically. It committed $80 million to Asia-focused alternative investment funds in the first quarter of 2021.

Similarly in April, the $134.4 billion US pension fund Washington State Investment Board committed up to $250 million to a pan-Asian buyout fund managed by Blackstone.

In contrast, pension funds in the UK and Australia have become more willing to conduct specific allocations to Chinese investments over the past year.

In October last year, Border to Coast Pensions Partnership of the UK and Australia's State Super separately announced mandates to increase their Chinese equity exposure. The British fund said it would allocate up to £500 million to two managers to run its China equity fund.

Meanwhile, the A$42 billion ($32.7 billion) State Super appointed a manager for its All-China Equity mandate, which has an undisclosed size.

LARGE CHINA COMMITMENT

Gregory Samorajski, IPERS

That is not to say gaining exposure to China is not of any interest to US asset owners.

Indeed, the country’s pension funds have in recent years sought to build exposures to Asia. This interest particularly incorporates China, do to its combination of strong economic growth, asset diversification and alpha investment opportunities.

The Iowa Public Employees’ Retirement System (IPERS) is one such example.

"As of today, within our non-US portfolio, we have around 45% contributed to emerging market (in which 46% from emerging market is China),” Gregory Samorajski, CEO of the $35 billion fund, told AsianInvestor. “That says China stood at 20% out of our non-US portfolio. We have large commitment to China, and it is set to continue."

He added: "Currently China is on the same terms as any other country in the world. We expect our commitment to China to continue."  

IPERS tends to leave specific investment strategies up to the external asset managers it has mandated for these investments. The pension fund currently invests into Asian public equities, public fixed-income and private equity, while it has yet to take any direct stakes in regional private credit or private real assets.

That could change, as the pension fund seeks to raise its private asset exposure this year.

“The main change for this year for our overall assets, is to shift from public assets to private investment (lowering its investment grade bonds from 28% to 20% from total AUM). Private credits, private real assets and private equities are among the increasing investment segments,” Samorajski said. 

Other major US asset owners have similarly substantial positions in Asia. A spokesman from Teacher Retirement System of Texas told AsianInvestor that about 17.8% of the pension fund’s $177 billion of assets under management was invested into Asia assets as of the first quarter. The pension fund declined to provide details on its China-specific level of exposure, or how this had changed year-on-year.  

US-CHINA TENSIONS

The emphasis of non-specific Asia investing over a China-focused approach also helps asset owners to more easily navigate the political uncertainties between the US and China, even if the real impact on investment may prove limited.

Some of those tensions have arisen as a result of the latter's domestic priorities, and these have particularly unsettled some asset owners that prioritise environmental, social and governance (ESG) factors.

In late May, Dutch pension funds ABP, Detailhandel, PMT and Woningcorporaties sold their stakes in several Chinese companies that are supposedly involved in the oppression of the Uyghur minority.

A spokeswoman from €573 billion Netherland-based APG told AsianInvestor in an email reply that "the pension makes buy and sell decisions every day based on the full spectrum of risk, return, costs and ESG considerations.The above selling transactions are in line with this approach."

Though the Dutch pension declined to comment on whether it would review its Asia or China exposures based on the latest news. 

European pension funds tend to rank ESG concerns higher than the US, noted Samorajski of IPERS. “As a general principle, some European pension plans are more conscious on ESG than US rivals."

However, the decision by the four Dutch funds to withdraw funds appears to be anomalous even among Europe investors. A senior executive from a European-based asset manager told AsianInvestor that he did not see “a trend to divest China from European pensions”.

ESG is typically lower on the list of priorities for US pension funds, but Simon Coxeter, growth markets director of strategic research at Mercer, said the principles are becoming a more important area of focus for the asset owners and other institutional investors as they look to invest in the region. 

Concerning headlines about the treatment of ethnic minorities make it harder to make a case for specific country investments.

Simon Coxeter, Mercer

ON-THE-GROUND TEAM

Another issue holding US pension funds back from specific investments into China, and Asia more broadly, is their lack of on-the-ground resources.

Several large pension funds from other countries, and particularly Canada, have established sizeable Asia-based investment teams. To date, no such similar activity from US pension funds has been seen, Coxeter told AsianInvestor

APG is one such asset owner. In 2019 it set up an investment team in mainland China, opening up its presence in the country. As of March, the pension had 17 people focused on emerging market equities, four of whom are dedicated to China A-shares. 

While US pensions have yet to make similar moves, they are becoming increasingly keen to work with regional investment experts.

“On-the-ground presence in Asia has become a more important requirement for some US pension funds in selecting consultants to assist them with their investment programmes, which reflects the emphasis on investment opportunities in the region,” Coxeter said. 

PRIVATE EQUITY APPEAL

As they look to raise their investments in the Asia region, US pension funds appear to be particularly keen to expand emerging market equities, China private equities and pan-Asia alternatives.

“Most US pension funds gain exposure to Asia via emerging markets public equity allocations. For those pension funds that invest in private markets, they may also get some exposure to Asia via private equity allocation,” said Coxeter.

He added that most of the funds typically tilt their Chinese asset exposures to offshore equities listed in Hong Kong and the US. However, he believes they will begin investing more into onshore A-shares as investors seek the full benefit of China’s diversification and alpha potential. 

On the other hand, the Alaska Permanent Fund Corporation (APFC), a US sovereign wealth fund, committed $80 million to Asia-focused alternative investment funds in the first quarter of 2021. It had a total of $76.3 billion assets as of May 20.

Similarly in April, the $134.4 billion US pension fund Washington State Investment Board committed up to $250 million to a pan-Asian buyout fund managed by Blackstone.

"Currently China is on the same terms as any other country in the world. We expect our commitment to China to continue,” he said.