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Managers ride A-share wave to attract more investments

Firms pile on strategies to offer institutions way into hot Chinese market

Aaron Costello said now is a great time to invest in China but urged doing it gradually.

Money managers are launching stand-alone China A-share strategies or adapting existing approaches to accommodate strong interest they see from institutional investors.

Managers with established A-share strategies are highlighting their experience and winning business, while global equity and emerging markets equity specialists are leveraging existing expertise to launch dedicated China A-share strategies or broaden exposure to the market within separate accounts in response to investor interest, industry watchers said.

Because index provider MSCI Inc. added a 5% weighting to large-cap China A shares in its emerging markets and other indexes this summer, "people will have to invest in A shares whether they like it or not. MSCI has brought the issue to the table," said Aaron Costello, managing director and head of Cambridge Associate LLC's Beijing office, in a telephone interview.

Money managers and consultants report that investment in China is at the forefront of nearly every recent conversation they have had with investment officers from endowments, foundations, pension funds, sovereign wealth funds and family offices.

"Everyone is thinking about China right now. It's the drumbeat of conversations with investors," said Shanta Puchtler, CEO and president of Man Numeric, Boston. The quantitative manager, which managed a total of $34.7 billion as of Sept. 30, launched its first actively managed China A-share strategy in September.

Among other active managers that already launched or soon will offer stand-alone A-share strategies are Acadian Asset Management LLC, PanAgora Asset Management Inc. and Robeco Institutional Asset Management BV.

Investment in China A shares for institutional, family office and retail investors represents a lucrative new opportunity for both fundamental and quantitative active managers struggling to find returns in the U.S. and other developed country markets, sources said.

China A shares are attractive to active managers because their valuations are so much lower than equities in many developed markets.

Firms that have run A-share strategies for some time "have added a lot of value with some amazing returns — 500 to 1,000 basis points annually. There aren't many managers with long track records, but they are pretty compelling," said Cambridge's Mr. Costello.

Huge growth

Equally compelling for managers contemplating the launch of such strategies is the huge growth in assets for the small number of dedicated A-share funds, sources said.

In the five years ended June 30, assets managed in dedicated China A-share strategies by 22 managers rose 220% to $36.537 billion, data from eVestment LLC, Marietta, Ga., showed. Growth in the 12 months ended June 30 was 38.4% and year-to-date growth as of that date was 8.6%, according to eVestment data.

"It's notable to see the AUM (of China A strategies) rise over time, more than tripling since the beginning of 2013," said Peter Laurelli, eVestment's New York-based global head of research in an email, noting that allocations to dedicated China A-share strategies were strong through the first half of 2018.

UBS Asset Management, which managed $2.2 billion in dedicated China A-share strategies as of June 30, was the largest manager in eVestment's small universe. UBS' China A-share AUM was up 64.5% in the five years ended June 30, eVestment data show.

UBS continues to experience strong demand for and interest in its China A-share strategies from pension funds, sovereign wealth funds and wealth management clients, said William Ferri, the head of New York-based UBS Asset Management America, head of UBS-AM multimanager and hedge fund solutions, in an email.

Mr. Ferri declined to identify investors in the strategies.

UBS managed a total of $830 billion as of Sept. 30.

Research at J.P. Morgan Asset Management (JPM), New York, predicts "substantially more inflows into China A-share investments from offshore (investors) over the next few years, primarily from European and U.S. institutional investors," said Alexander Treves, managing director and emerging markets and Asia-Pacific investment specialist.

"We've seen a meaningful uptick in institutional investors seeking greater context on China A shares as they consider the role this market should play in long-term portfolios," Mr. Treves added.

J.P. Morgan managed $2 billion in dedicated China A-shares strategies as of June 30, up 64% in the five-year period, eVestment data show.

JPMAM managed a total of $2.077 trillion as of Sept. 30.

Recent investments

Despite the promise of high inflows, the pace of investment still is modest, sources said. Among recent A-share investments:

The C$95.7 billion ($73.7 billion) Alberta Investment Management Corp., which manages assets of pension, endowment and government funds in the Canadian province, hired BlackRock (BLK) Inc. (BLK) to manage an undisclosed amount (Pensions & Investments, May 31).

The chief investment officer of the A$67 billion ($50 billion) Unisuper Management, Melbourne, which manages assets for Australia's higher education and research sector, said his fund was building a position in A shares, but declined to disclose details (P&I, July 6).

Matthew Liposky, chief investment operating officer with the $71.8 billion Massachusetts Pension Reserves Investment Management Board, Boston, said PRIM set up eight accounts ahead of MSCI's inclusion in June to allow its emerging markets managers to trade directly in mainland-listed stocks.

Consultants, including Cambridge Associates, are urging institutional investors to consider investment in China because of the depth of the market and the ability of managers to generate alpha to enhance their portfolios. "If there's ever a time to invest in China, it's now," Mr. Costello said. But he cautioned that investors should "dip a toe in, not plunge in headfirst."

Verus Advisory Inc. is guiding its institutional clients in the development of implementation strategies for adding more exposure to the Chinese market, said Eileen Neill, an El Segundo, Calif., managing director and senior consultant.

"We believe the market indexes do not currently reflect the China A-share opportunity set. It makes sense for clients to consider an alternative exposure which will enable them to better capture the local China market potential," she added.

Acadian Asset Management sees demand for A-share strategies coming from two types of institutions with different motivations, said Ross Dowd, co-CEO of the Boston quantitative specialist.

Some large institutions are considering the addition of China A shares to existing actively managed emerging markets equity or global equity strategies in a weighting close to that of the index to avoid the risk of trailing the MSCI benchmark, Mr. Dowd said.

Other investors, especially endowments and family offices, are more likely to invest in a dedicated strategy with active managers that can exploit market inefficiencies to produce significant alpha, he said.

Acadian launched a stand-alone A-shares strategy in January that has attracted $35 million, mostly from U.S. and European institutions. The firm also invests in A shares in its global and emerging market equity strategies.

Acadian managed a total of $99.6 billion as of Sept. 30.

'Main topic of conversation'

Like other managers with experience managing equities in China and other emerging markets, PanAgora Asset Management sees "lots of interest from existing and potential clients. Wherever we go, it's the main topic of conversation," said George D. Mussalli, chief investment officer and head of research, equity, at the Boston-based quant shop.

PanAgora is finding that investors are most interested in a discrete China A-shares strategy that will provide a higher allocation than the 5% weighting in the MSCI indexes, Mr. Mussalli said. He said many investors are interested in "front-running the index and capturing more alpha ahead of the slow buildup in the China A-share exposure in the MSCI Emerging Markets index."

PanAgora has included A shares in its quantitatively managed emerging markets equity strategy and intends to launch a stand-alone A-shares strategy by the end of the year, Mr. Mussalli said.

PanAgora managed a total of $52 billion as of Sept. 30.