The desire of US state pension funds to diversify is causing some headaches when it comes to keeping up in Asia, and particularly China.
The largest economy in the region – and the second-biggest globally – is rapidly liberalising international access to its capital markets. But that places the onus on offshore investors like US pension funds to keep up. It's no easy task.
Most US pension schemes hold underweight exposures to the country, relative to its global domestic product and purchasing power parity weights globally, said Rich Nuzum, New York-based president of the retirement and investments business at consultancy Mercer.
Yet some are increasing their investment weighting automatically as A-shares are steadily included into global emerging market indices, such as those of index provider MSCI.
That’s the case for Calstrs, as Scott Chan, the $241 billion fund’s CIO, told AsianInvestor in June (see the Summer 2019 issue of AsianInvestor magazine). He feels there will be some good opportunities for actively managed strategies in Chinese stocks, given the retail-heavy (and thus inefficient) nature of the market.
Meanwhile, some US public pension schemes have been considering dedicated A-share mandates, and some have been taking the plunge, said Nuzum, without naming names.
Similarly Jay Kloepfer, head of capital markets research at US investment consultancy Callan, agreed his firm had conducted A-share manager searches.
But few are seen to be making a dedicated allocation. Indeed, the Alaska Retirement Management Board (ARMB), which runs the US state's retirement funds, in September decided against a standalone China stock allocation, having been considering it since last year.
Meanwhile, Washington State Investment Board in August told AsianInvestor it was close to completing a search for emerging market equity managers. As part of this process, the $135 billion plan will consider China-focused mandates, potentially with access to A-shares, a spokesman said. Its total allocation to China is $3.5 billion, or 2.6%.
Mike Keough, San Francisco-based head of core institutional sales at DWS Investments, is seeing US state pension funds increasingly adopting a global benchmark, which affects how they estabilsh their strategic allocation.
"So you don't typically see a distinct allocation to Asia," he added. "You'll see non-US and tht is generally divided into developed countries and emerging countries based on the benchmark."
TRADE WAR TRIALS
One factor hindering greater US investor flows into A-shares is the perception that it’s not a good look to invest more in China in the midst of the current trade war, said Kloepfer.
Still, he believes that it will prove to be a blip. “Politics are perhaps delaying it, but in the longer-term it’s hard for me to imagine that pension and endowment or foundation portfolios won’t have dedicated China equity exposure. Though I think bonds are a little further behind," he told AsianInvestor.
Indeed, Asia tends to represent a very small proportion of US public pensions’ bond portfolios. Calstrs’ approach is a fairly typical one: a US-orientated benchmark with little Asian exposure.
However, some US state asset owners are eyeing renminbi debt investments, as Beijing moves to open the market up to foreign investors.
Alaska Permanent Fund (APF) – admittedly a sovereign wealth fund rather than a pension plan – is hoping to trade onshore China bonds from August 2020, having started including them in its fixed income benchmark in April this year.
US state retirement plans are likely to make similar moves, but it’s likely to be some time before most opt to do so. They will need to do more homework, and will probably want to see the outcome for trailblazers like APF, before making such commitments.
This article has been adapted and updated from the feature 'US state pensions' Asia dilemma' in the latest (Autumn 2019) issue of AsianInvestor magazine.