Asset owners agree to disagree on global investing
Asset owners and advisers agreed to disagree on best practices in international investing at AsianInvestor’s 2nd annual China Global Investment Forum in Beijing this week.
One on-stage debate centred on the approach institutions should take to accessing emerging and developed markets and whether active or passive was the best way. It is a poignant issue in mainland China, where asset owners are beginning to diversify overseas in increasing numbers.
The forum heard that Chinese sovereign institutions tended to invest in developed markets, a reflection of the fact that China itself is an emerging market. They are seeking returns uncorrelated to their own domestic market.
There is also considered to be less political risk and more manageable volatility in developed markets than in developing countries, with clear and established rules of engagement in the capital markets.
These are important considerations for institutional investors in China, in many cases reaching out into global markets for the first time. It is a way to avoid the difficulty of hedging political risks such as capital account controls and taxation uncertainty.
It is not only insurers such as China Life that have started to hand out overseas mandates, as reported. Sovereign investors also see the value of outsourcing to external managers, usually paying management fees to target alpha.
At sovereign wealth fund China Investment Corporation, for example, more than two-thirds (67.7%) of assets were being managed by external houses at the end of 2014.
Many of these focus on complex hedge fund strategies including statistical arbitrage and fixed income relative value. Traditional equity and fixed income portfolios are more typically managed internally.
Firmly in the active management camp and speaking on the global investing panel was Stephen Joske, senior manager in the Asia investment division of AustralianSuper.
The $90 billion pension fund has generated an average annual return of 7.3% over the past 10 years, which Joske attributed to a philosophy of active management and strategic allocation, including macro-economic forecasting and individual stock selection.
“We have a strong preference for active management,” he stated unequivocally. “We have to do better than benchmark and market average.”
He noted that the pension fund selected a small number of external managers to try and make sure they were able to contribute to returns. “We focus on four or five [external] managers who are very good on every asset class,” he explained.
Larry Cao, Asia-Pacific content director at the CFA Institute, agreed on the importance of manager concentration, pointing out that hiring numerous external parties in the same asset class would ultimately be rendered meaningless.
“If investors such as CIC and AustralianSuper invest through too many [external managers], the result will be similar to index investing, but at a higher cost,” he said.
Christopher Hunter, managing director at consultancy Cambridge Associates, acknowledged that most institutional portfolios focused on active management when investing overseas, particularly when it came to hedge funds and private equity plays.
But he pointed out that Cambridge was recommending a high level of passive investment for certain institutions, notably when investing in emerging markets.
“Many of our clients have said they wanted to take active approach to generate alpha, but in fact if you had invested passively over five to 10 years through index investments [in emerging markets] you would have done better than if you had invested actively,” Hunter said.
He noted that a number of institutions opted to build simple portfolios and adopt a passive approach, focusing on asset allocation rather than external manager selection. “Most [portfolio] return comes from decisions on asset allocation,” he observed.
Joining in the panel debate on best practices in international investing was Wallace Yu, head of multi-asset group at CIC. All comments made by CIC staff during the China Investment Forum were non-attributable by prior arrangement.