Princeton University economist Burton Malkiel has his work cut out for him persuading U.S. institutional investors to move into all-China strategies.
But Mr. Malkiel, known for his book, “A Random Walk Down Wall Street,” is undeterred as chief investment officer of Baochuan Capital Management, Walnut Creek, Calif., a firm he founded with Kevin Carter, its CEO, and Mark Adams, its director of Research. (Baochuan is a Chinese word for treasure boat).
China-only investment strategies are a rarity in institutional investing, but Mr. Malkiel maintains “The Chinese growth miracle is only in the middle innings.”
Mr. Malkiel insists institutional investors are missing out on investing in the world's fastest growing economy; since the early 1980s, he says, China has expanded at more than 9% a year, after inflation.
“Neglect of China is a striking example of the lack of adequate diversification,” he says of institutional investor portfolios.
Most institutional investors have a 1% or 2% China equity exposure through Asia or emerging markets portfolios. That's low, Mr. Malkiel says, given that China makes up around 10% of the world's GDP. He argues institutional investors should have a minimum 5% exposure.
Many money managers offer China exposure as part of an emerging markets or Asia-only strategy, but offering a stand-alone China equity approach is unusual.
Among Baochuan's biggest competitors is Matthews International Capital Management LLC, San Francisco, which last October started offering institutional class shares in its two China-equity-only mutual funds, the Matthews China Fund and the Matthews China Dividend Fund. Matthews has $19 billion under management. Of that total, about $3 billion is in the China-only funds, with roughly $67 million of that from institutional investors.
Officials at Baochuan and Matthews say that while there's increased interest among U.S. institutional investors in China, major challenges remain in persuading them to accept China-only strategies.
Mr. Malkiel said one problem is that world indexes like the MSCI All Country World Index are free-float-weighted, meaning they only count shares of companies that are readily available to all investors.
Under that methodology, China only carries an approximate 2.3% weight in the ACWI because the index does not include Chinese A shares, which generally are only available to Chinese residents. (China has granted a limited number of licenses to foreign institutional investors that allow investments up to a set quota.)
Institutional investors are increasingly asking about China, but they are still more interested in broader Asia mandates with exposure to China, said Jodi L. Borkowitz, senior vice president at Matthews. “They are looking at the region first,” she said.
Ms. Borkowitz said that part of the issue regarding China-only equity investments is convincing consultants and investors that there is more opportunity than the index weightings reflect. For example, she said the MSCI China index is dominated by major banks and energy companies, leaving booming sectors driven by the rise of the middle class — like health care and consumer goods — less represented.
