More institutions segregating China A shares
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • watch video
      0:45
      Private funds weathered 2020 turmoil
      Daniel McHugh
      Aviva Investors promotes from within for real assets CIO
      Marc Rowan
      More alts managers seek expansion to retail market
      Mellody Hobson, president of Ariel Investments, speaks during an interview in Hong Kong on Sept. 1, 2017
      Ariel launches effort to boost minority business owners
    • Kieran Mistry
      Hymans Robertson picks head for new non-traditional risk transfer unit
      Troy Saharic
      NEPC brings on director of new business development
      Bill Foley
      Foley-backed SPAC agrees to $7.3 billion deal with Alight
      Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
    • OMERS CEO Blake Hutcheson
      OMERS records worst loss since 2008 on bad COVID-19 bets
      Mitchells & Butlers turns off tap on pension contributions until April
      Jerome Powell, chairman of the Federal Reserve, adjusts his glasses during a Senate Banking, Housing and Urban Affairs Committee hearing in Washington on Sept 24, 2020.
      Powell says Fed will hold steady during economic recovery
      Institutional investors mobilize for equitable global COVID-19 response
    • Database's debut focuses on public-sector DC plans
      DC plan sponsors differ on need for annuities – survey
      Biden’s retirement idea getting the cold shoulder
      Few participants tapped savings to weather pandemic – Vanguard
    • After strong 2020, ESG investments forecast to grow more – Moody's
      Emissions rise from the coal fired power plant in South Carolina
      U.K. managers seen pressuring firms on diversity, climate change
      Asset management industry remains vastly white, male – survey
      Institutional investors mobilize for equitable global COVID-19 response
    • 2 U.K. pension execs take on ESG investing in new podcast
      Donation illustration
      Jefferies will use trading commissions to do good
      Michael Arougheti
      SPACs ride wave as latest investment darling
      Spirit winners
      Prudential honors young people who are helping out
    • Robert 'Rob' Shafir listens during a Senate Permanent Subcommittee on Investigations hearing in Washington on Feb. 26, 2014
      Sculptor hedge fund hits sixth straight year of outflows
      The WallStreetBets forum on the Reddit Inc. website on a laptop computer and the GameStop logo on a smartphone in an arranged photo.
      GameStop frenzy has hedge fund managers rethinking next moves
      Gabe Plotkin, chief investment officer and portfolio manager of Melvin Capital Management, speaks during the Sohn Investment Conference in New York on May 6, 2019
      Citadel, Point72 back Melvin with $2.75 billion after losses
      Shanghai skyline
      Global hedge funds struggle even in a more open China market
    • Natixis 401(k) participant charges self-dealing in ERISA suit
      Database's debut focuses on public-sector DC plans
      Settlement reached in stock-drop suit against IBM
      University of Vermont slates $5 million for health-care fund
    • Thasunda Brown Duckett
      TIAA appoints Thasunda Duckett as president and CEO
      Brightwood Capital adds senior investment professional
      Kimberley Stafford and Alec Kersman
      PIMCO names product strategy group head
      Praesidium chooses director of client service, business development
    • Doug Heron
      Lothian Pension Fund to lose CEO this year
      Truist Financial puts $387 million in pension plan in Q1
      OMERS CEO Blake Hutcheson
      OMERS records worst loss since 2008 on bad COVID-19 bets
      Exelon to charge up $556 million in pension contributions
    • Doug Heron
      Lothian Pension Fund to lose CEO this year
      Correction: PGIM Real Estate
      Thasunda Brown Duckett
      TIAA appoints Thasunda Duckett as president and CEO
      Brightwood Capital adds senior investment professional
    • Carlyle secures $4.1 billion ESG-related credit facility
      Hamilton Lane raises $3.9 billion for fifth secondary fund
      PSG closes first Europe-focused fund at $1.5 billion
      Kohlberg closes latest private equity fund at $3.4 billion
    • Sebastiano Ferrante and Jocelyn de Verdelon
      PGIM Real Estate turns to staff to fill new roles
      European managers key in on specialist strategies
      Ingrid Jacobs
      Jones Lang LaSalle brings on head of diversity and inclusion
      EQT inks deal to buy real estate manager
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
      David Ireland
      Sponsors returning to questions about in-plan annuities
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
    • Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
      P&I 1,000 largest retirement plans: 2021
      Retirement in emerging markets
      Outlook 2021
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Clackamas County sticks with Voya as record keeper
      San Bernardino County seeks record keeper for 3 DC plans
      University of Vermont slates $5 million for health-care fund
      Santa Barbara County Employees commits $20 million to direct lending fund
    • Clackamas County sticks with Voya as record keeper
      San Bernardino County seeks record keeper for 3 DC plans
      University of Vermont slates $5 million for health-care fund
      Santa Barbara County Employees commits $20 million to direct lending fund
    • Emerging Market Equity Manager Services
      Securitized Credit Manager Search
      Private Placements Asset Manager Search
      Actuarial Consultant Search
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Tesla cartoon
      Don’t confuse wealth creation with retirement saving
      Top 1000 cartoon
      Top 1,000 retirement plans weather storm just fine
      Infrastructure cartoon
      You must go big on infrastructure, Mr. President
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • Shifting DC Times – Winter 2021
      Bond ETFs show maturity during Covid market mayhem
      Pension Consolidation: Optimizing Scale and Maximizing Efficiency
      China is embarking on a new stage of growth
    • Lawrence Cunningham
      Commentary: Gensler should keep Clayton’s pragmatic proxy adviser rules
      My-Linh Ngo
      Commentary: Pension funds and the role of the debt market in the fight against climate change
      Bill Peressini
      Commentary: Carbon’s elemental role in the future of impact investing
      Teresa Ghilarducci
      Commentary: Lower rates for longer mean a drastic rethink on funding
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      How will gold react?
      To people shaking hands
      P&I Content Solutions
      Lessons From 2020: Today’s OCIO Model Passes a Major Test of Governance
      Sponsored Content By MassMutual
      Leveraging Data to Manage Risk
      Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      0:45
      Private funds weathered 2020 turmoil
      watch video
      0:59
      Secure choice and other retirement plans at a state level
      watch video
      3:33
      P&I 1,000 by the numbers 2021
      watch video
      1:33
      A look at hiring activity in 2020
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      Technology is the New Oil: The Changing Nature of Emerging Markets
      Powering the Change: The power of diversity and inclusion
    • POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
      POLL: The Biden administration’s economic plans
      POLL: Retirement issues in 2021
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • By the Numbers for February 2021
      Top Performing Managers of Convertibles, 4th Quarter 2020
      Top Performing Managers of Domestic Growth Equity, 4th Quarter 2020
      Top Performing Managers of Domestic Limited-Duration Fixed Income, 4th Quarter 2020
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      Technology is the New Oil: The Changing Nature of Emerging Markets
      Powering the Change: The power of diversity and inclusion
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. INVESTING
December 14, 2020 12:00 AM

More institutions segregating China A shares

Investors hoping to enhance returns by creating dedicated exposures to hot asset class

Paulina Pielichata
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Graham Long
    Photo: Simon Vine
    Graham Long said his U.K. fund created a separate portfolio for China in October.

    Institutional investors increasingly are splitting out China equities from their emerging market equity allocations to gain more exposure to alpha opportunities and better manage environmental, social and governance risks.

    Global allocators from Europe and Australia recently have created dedicated exposures to China A shares, despite the increasing weight of China shares in major emerging market equity indexes.

    In June, FTSE Russell completed the first stage of its China A-share integration into its FTSE Emerging All Cap index, increasing China's weight to 6% and adding 1,051 new large, medium and small-cap companies. Starting in 2018, MSCI Inc. began to include China A shares in its MSCI Emerging Markets index. The index had more than 1,500 China A shares, which constituted 5% of the index, as of Aug. 30, alongside a 37.4% exposure to China through the offshore market.

    However, FTSE Russell announced Dec. 4 that it will remove eight Chinese companies from its global and China A indexes in response to a White House order banning investments in Chinese companies deemed to be supporting the country's military. The action will take effect Dec. 21, following the FTSE Global Equity Index Series quarterly review, and more companies could be removed at a later date.

    The MSCI China A Onshore index gained 23.4% year to date to Oct. 30 and 3.9% over the last three years annualized. The MSCI China A International index delivered 24.7% year to date and 5.4% in the last three years annualized. Meanwhile, the MSCI Emerging Market index added 0.87% year to date and 1.94% over the three years annualized.

    Investors cited China A shares' outperformance over broader emerging markets as one of the motivations to create separate China portfolios.

    Sources added that China's economy is expected to surpass the U.S. as the world's largest economy by 2030. For long-term global investors, that outlook is expected to create opportunities. Domestically, they view China as an inefficient equity market dominated by retail investors — and one where institutional investors using active strategies can find alpha.

    Related Article
    Willis Towers Watson sees China allocations quadrupling by 2030
    Safe haven

    China has also proven to be a safe haven among other emerging markets.

    "We had a massive global financial crisis this year and Chinese equities, bonds and currencies didn't sell off in a way that other emerging markets did sell off. When people get scared, they want to sell emerging markets," Jan Dehn, global head of research at Ashmore Group PLC in London, said in a telephone interview, adding that getting into the global indexes has helped China continue to execute its long-term efforts to attract foreign capital.

    Willis Towers Watson PLC's research published Nov. 30 showed that Chinese risk assets should account for 20% of global investor growth portfolios over the next 10 years, compared with the current average exposure of 5%.

    Investors said they are creating separate China equity allocations to diversify their portfolios and generate alpha. At the same time, they added that a standalone portfolio gives them a better understanding of country risk as well as a better understanding of specific ESG challenges faced by companies in China.

    The £45 billion ($59.9 billion) Border to Coast Pensions Partnership, Leeds, England, allocated between £300 million and £500 million in October to a new, separate China portfolio run by UBS Asset Management U.K. Ltd. and FountainCap Research & Investment Co. Ltd.

    The partnership had been managing its emerging market fund internally. That internal team will continue to manage the ex-China portion, said Graham Long, Leeds-based head of external management at the pool of local authority pension funds. With the restructuring of the emerging markets allocation, he said the pool in effect will have three "sleeves"— a global emerging market ex-China allocation and two new sleeves run by the two managers. Regarding the motivation behind splitting out China and outsourcing the running of the allocation to specialist managers, Mr. Long said that China as a portion of the emerging market universe is increasing.

    China has increased from 35% to 45% of major emerging market benchmarks this year, he said. Part of that move was because of the A-share increase in wider emerging markets indexes, he said.

    "We haven't reached a stage where the proportion of China market cap is fully included, there is still somewhere to go," he added. China's weighting in the MSCI benchmark is anticipated to reach between 53% and 55% of the index when onshore China is fully included, consultants said.

    Related Article
    World’s biggest investors split China bets from emerging markets
    Coronavirus control

    Another factor contributing to the decision was the fact that the Chinese government managed to contain the coronavirus better than other emerging markets. "If you look at the COVID-19 impact on emerging markets, China got COVID under control," he said.

    State Super, a A$44 billion ($32.5 billion) superannuation fund in Sydney, which is a trustee for the State Authorities Superannuation Scheme, State Superannuation Scheme and Police Superannuation Scheme, took a different approach when it awarded a new China equities mandate to Ninety One PLC in October. "It is a sizable mandate," said Charles Wu, acting chief investment officer of the fund, adding that the fund added the new strategic allocation alongside its broader emerging markets mandate.

    He didn't disclose the size of the new strategic allocation. "We have identified that the market is fragmented and as a result it's a better opportunity set for active managers," he said.

    For State Super, an all-China allocation is also a better way to understand risk. "The appointment allows us to have a specialist manager that (can) take some of the issues specifically related to ESG into account in more detail," said Andrew Huang, senior investment officer for equities at State Super in Sydney.

    An allocation to domestic China shares is a portfolio diversifier and also a market with fertile ground to add alpha, he added. Mr. Wu added that the opportunities in broader emerging markets and all-China shares are complementary to each other, although fund executives will evaluate the situation on an annual basis and as the market evolves.

    It's also "possible" that emerging markets as an allocation will become redundant in the years to come, he said, as China increasingly dominates the indexes.

    Betting on emerging opportunities in the China domestic market — for example, in clean energy — is APG Asset Management, the in-house manager of Stichting Pensioenfonds ABP, Heerlen, Netherlands, which has €462 billion ($552.7 billion) in assets and invests in China with E Fund Management Co. Ltd.

    Bloomberg
    Separate China allocation

    Rene van der Zeeuw, managing director, emerging markets equities at APG Asset Management, said the firm currently invests €900 million via a separate China allocation through a concentrated portfolio of 26 companies listed on the Chinese domestic market. That allocation was funded from its €44 billion emerging market equity allocation, which also is managed in-house and retains an exposure to China.

    Mr. Van der Zeeuw said that APG could increase its standalone allocation to China even more in the coming years. "It's a specific market (where) institutional investors' participation is low," he said.

    Simply relying on a external manager to gain China exposure through an active emerging markets portfolio may not be giving investors the allocation they want to the domestic market, sources said. Paul Colwell, head of the advisory portfolio group for Asia at Willis Towers Watson in Hong Kong said: "Many of the emerging market managers tend to be quite underweight in China. Most emerging market managers play the Hong Kong offshore market. Dedicated China managers tend to focus on the mid-cap (domestic) space."

    Still, Mr. Colwell said that a separate China onshore portfolio should feature multiple managers. "You can get access to really nice alpha, but it is volatile. The gap between the best and the worst (managers) over the last 10 years, could be more than 10 percentage points per annum," he said.

    ESG challenges

    As investors are stepping up their ESG investment processes, they are confident that standalone portfolios can actually help manage ESG risks in China according to their responsible investment policies.

    Mr. Huang said that the new capability helps State Super to navigate ESG risks specific to China. Ninety One's ability to stay on top of the latest ESG trends helps with company engagement for the "cases where there are controversies that have to be actively managed," he added.

    "We do ask quite frequently what the manager intent is (when it comes to ESG)and how they deal with it at a portfolio level," he said.

    Border to Coast's Mr. Long agreed that ESG is a challenge due to the scarcity of company disclosure. Still, he said: "I don't think China is different to other emerging markets."

    APG's Mr. Van der Zeeuw added: "We know we have to work hard in China to find good companies that fulfill (our) profile. That does not mean that we (lower) our standards when we invest in China. We are as critical about a Chinese company as about companies in developed markets." He added that APG considers the willingness of Chinese companies to start disclosing as a factor in its stock selection process.

    Kathy Kejia Xu, senior portfolio manager at APG in Hong Kong, added: "The companies in our portfolio have the potential to improve."

    APG scores companies based on its own scorecard developed for its emerging market investments and most of its Chinese investments have average scores.

    "When we don't agree (with a company's practice), we would vote against the company (in meetings). Chinese companies have gotten used to more foreign firms in the market and the criticism, for example, on carbon issues because the top government in Beijing has a high target to go green (by) 2060," she said.

    Hazel Bradford contributed to this story.

    Recommended for You
    BNY Mellon trust universe plans return median 13.2% in 2020
    BNY Mellon trust universe plans return median 13.2% in 2020
    BNY Mellon shifts active management to affiliates
    BNY Mellon shifts active management to affiliates
    Malaysian version of China’s Yu’ebao set for launch
    Malaysian version of China’s Yu’ebao set for launch
    Lessons From 2020: Today’s OCIO Model Passes a Major Test of Governance
    Sponsored Content: Lessons From 2020: Today’s OCIO Model Passes a Major Test of Governance
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Shifting DC Times - Winter 2021
    Bond ETFs show maturity during Covid market mayhem
    Pension Consolidation: Optimizing Scale and Maximizing Efficiency
    China is embarking on a new stage of growth
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    Gold Outlook 2021
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center