The California State Teachers' Retirement System (CalSTRS), the second-largest US pension fund, has published a request for proposal (RFP) in search of China-focused public equity managers.
Despite CalSTRS already holding around $3.7 billion worth of investments in Chinese equities, it is the first time the fund, which manages $305 billion in assets, has looked to appoint a specialised team for this fast-growing asset class.
CalSTRS current exposure to China equities is a mixture of internally managed and externally managed strategies, a representative told AsianInvestor in emailed comments.
"The purpose of the RFP is to find out if there may be a better way to implement our existing China equity exposure," the person said.
According to the RFP, the US pension fund plans to establish three investment strategy categories targeting Chinese public equity.
“CalSTRS is conducting its first search for dedicated China Public Equity Managers (China Equity Managers) by establishing three investment strategy 'categories', one each for Greater/All China, China A Share, and strategies benchmarked to the MSCI China indices,” said the representative.
They explained that the major determinants for which category a strategy will be assigned is to be based on the investable universe of the strategy, and the strategy’s benchmark.
ACCESS TO CHINA
In a separate interview, Alexander Treves, head of emerging markets and Asia Pacific equities investment specialists at JP Morgan Asset Management, told AsianInvestor that while it is not an absolute necessity for foreign asset owners to have a regional presence to access the China equities market, there can be a lot of complexity to navigate which means having boots on the ground is an advantage.
“It can also affect your investment decisions," Treves said. "Very deliberately, we've got a team of 16 dedicated Greater China analysts; they're all based in the Greater China region — either in Hong Kong, Taipei, or Shanghai.”
“They all read Chinese, they all speak Mandarin, and we do think that's important because in terms of being able to ‘kick the tyres’, to access management and to read disclosures, if you limit yourself to being offshore, and only English speaking, then there's a lot which is not available to you,” he said.
Within China, quite a lot of disclosure will be richer and more detailed in Chinese as opposed to the translated English information, explained Treves.
“If we think about ESG disclosure, for example, we have found that information which is available is better in Chinese than it is in English, which is one reason that we prefer proprietary ESG data rather than purely sourcing from the external ESG ratings providers,” he said.
Another factor that Treves believes will be temporary but is currently very significant is that these China analysts are able to travel within the country and visit these companies when making their assessments.
“Whereas if you're not based in China, then getting in can be profoundly difficult, if not impossible, during the pandemic. So there's definitely an additional advantage right now, but I wouldn't expect that to be the case in a couple of years,” he said.
As US and European investors grapple with tightening central bank policy, there appears to be a growing need to seek asset and geographical diversification. Although Treves does not agree that this need is currently any greater than it should have been up to 12 months ago.
“Structurally, there's a clear imperative for US and other asset owners to have more money in China. And the first layer of that argument is just that Chinese capital markets are very under-represented in global portfolios compared to the size of the Chinese economy,” he said.
The other factor contributing to investor interest in China, is that there's been very rapid and significant developments in the breadth and the depth of the investable opportunity set, he added.
“If you go back about 25 years, China basically represented 0% of investable assets in Asia. China wasn't included in MSCI indices, as Mainland companies only started listing offshore about 25 years ago. Today there are more companies listed in China than in the US. Now they're not all big or as liquid as other markets, but there is a wide array of things to invest in,” Treves said.
He said onshore Chinese equities present alpha opportunities to investors as they are less efficiently priced, and they have a very low correlation with other asset classes which serve diversification purposes.
“At the moment, all of this is underpinned by the fact that the Chinese central bank is just behaving in a very different way than almost every other central bank globally, so I think there is a counter-cyclical argument anyway,” he said.
For Treves, ultimately, the investment case is that the Chinese equity asset class has grown exponentially and is only projected to grow further over time.
“Chinese equities offer opportunity, and they are a diversifier, and a lot of foreign players don't have much exposure to this asset class. In the back of their minds, they know they need more exposure to it and it's really a matter of how they get that.”