In October 2014, the $179.5 billion Tallahassee-based Florida State Board of Administration committed $100 million to a commingled A-shares fund managed by William Blair & Co., Chicago. A Florida spokesman said June 9 that the mandate had been drawn down — either to meet liquidity needs or for redistribution to other global equity managers — after William Blair decided to close the strategy. Staff at both pension funds — while acknowledging that the more than 80% of turnover accounted for by Chinese retail investors has made the A-shares market a volatile, less than perfect price discovery engine — said such inefficiencies leave room for skilled managers to garner outsized gains.
Florida saw “alpha opportunity” in the A-shares market's size and relative inefficiency, said spokes-man John Kuczwanski in an e-mail. From inception through March 30, the strategy has returned 30.4%.
Even so, with continued restrictions on repatriating capital and relatively high levels of market intervention, “we have no immediate plans to increase dedicated China A-shares exposure” now, he wrote.
Enough details about China's markets remain unresolved to leave the bulk of U.S. pension funds content to rely on their emerging markets managers to add A-shares exposure as and when they see fit, as opposed to making dedicated allocations to the world's second-largest equity market anytime soon.
The past year saw progress in a number of important areas, including clarifying both the ownership rights of foreign investors and the limits on listed firms' scope for suspending trading in their shares, but many risks have yet to be entirely resolved, said Andre Clapp, senior investment officer-public equities with the $60.4 billion Massachusetts Pension Reserves Investment Management Board, Boston.
Potential sticking points include a monthly 20% repatriation limit on capital invested and a temporary waiver on capital gains that could be removed at some point, noted Mr. Clapp.
If MSCI follows through this year on its proposal to add an initial 5% sliver of China's A-shares market to its global emerging markets benchmark index, for a weighting of just more than 1% in that index, PRIM will count on the seven emerging markets managers overseeing more than $4 billion of PRIM's assets to find opportunities there, he said.
MSCI's annual review this week will be the third in a row where China A-shares have been the most prominent issue on the agenda.
The past year found China's regulators announcing a number of reforms in response to concerns raised by asset owners and money managers as reasons for not adding A-shares to MSCI's indexes in June 2015.
Among them, a quota system under the country's 13-year-old qualified foreign institutional investor program was changed to a registration system for investments of up to $5 billion, with a formula introduced to link access to China's markets to the size of a manager's assets under management. Limits on repatriation — in terms of both amounts and holding periods — were reduced.
But new issues came to the fore in 2015 after a wild market rally in the first half of the year gave way to a 43% plunge in the second half, a drop that found China's government intervening directly and repeatedly to throttle. At one point in the sell-off, more than 1,000 companies listed in Shanghai and Shenzhen suspended trading in their shares.
Opinion remains mixed with regard to what MSCI will decide. In a May 31 report, Goldman Sachs Asset Management raised the odds of MSCI adding A-shares to its indexes to 70%, citing late-breaking progress on the issues of beneficial ownership and limits on voluntary stock trading suspensions. Two months earlier, GSAM called that prospect a toss-up.
At Macquarie Securities Group, analyst Trista Rose in an e-mail stood by her firm's call last month that, in the wake of China's “heavy-handed stock market interventions,” it remains too soon to ask institutional investors to have confidence in China's institutional framework.
Still, at a moment when stock markets around the world are looking toppish, the prospect of a roughly $7 trillion, retail investor-dominated market beginning to come in to benchmark indexes will offer a mix of risk and opportunity that asset owners won't be able to ignore, analysts say.
For now, some observers are emphasizing the risk in A-shares' risk-reward tradeoff.
The market will inevitably offer investors opportunities, but with retail investors helping to drive the A-shares market's roller-coaster ride over the past year, “I am somewhat apprehensive about the volatility,” conceded Stanley Mavromates, a Boston-based partner and chief investment officer, Americas, with Mercer Investments.
Others see grounds for accentuating the positive. Graham Harman, a Sydney-based senior investment strategist, Asia-Pacific, with Russell Investments, said in an e-mail the “inefficiencies in the A-share market are definitely a reason to be involved” with the low levels of sell-side coverage there usually associated “with a great opportunity set.”
