China's social security fund ready to issue global FoF mandates

Consultancy Z-Ben Advisors is tipping China’s National Council for Social Security Fund (NCSSF) to issue a round of RFIs/RFPs for global equity-based fund-of-funds mandates before Chinese New Year after it delivered a stocking full of pre-Christmas domestic mandates.

The fund granted domestic equity portfolio mandates to seven fund management companies (FMCs) and one securities firm on Christmas Eve.

The FMCs comprised four local firms – Dacheng, Guangfa, China Universal and Yinhua – and three joint-ventures, namely Fullgoal, ICBC Credit Suisse and HFT. Citic Securities, owner of China’s largest FMC, China Asset Management Company, bagged the other domestic mandate.

The choices of these firms came as little surprise, says Francois Guilloux, director of regional sales for Z-Ben Advisors. He notes that every FMC on the NCSSF’s list sits in the top third of industry rankings and all had provided solid returns in flagship equity funds over the past two years.

“While good news and a brand-burnisher for each of the successful FMCs, these selections were as unsurprising as night following day,” says Guilloux.

NCSSF employs the top 30-40% of firms to run mandates; and domestic equities will, over the long term, come to comprise the second or third-largest portion of the portfolio, behind fixed-income products, infrastructure and other trusts.

But Z-Ben considers the awarding of these mandates to be little more than deck-clearing before the overseas action begins.

For the past three years, NCSSF chairman Dai Xianglong has openly outlined two of his key goals for the fund: $300 billion in assets by 2015 (the fund’s AUM stands at $116 billion at present) and a “significantly higher” proportion of those assets invested outside China.

Guilloux notes that while more or less on track to achieve his first goal, the second ambition has lately seemed more of a hope than an expectation.

“Stymied once by the global market meltdown and once again by inescapably good prices in domestic infrastructure trusts, Dai now appears to have a clear path between his fund and the world’s markets,” he says. “His first step, we predict, will be a public RFI/RFP round for a number of equity-based global fund-of-funds mandates.”

NCSSF is seen as a role model for China’s asset management industry. When global markets crashed, it showed the country’s institutional investors how to hide at home. When the government then elected to support domestic asset values through infrastructure investment, the fund worked with trust companies to create investor-friendly infrastructure products and backed its interest with one of China’s largest wallets.

“Now, as cross-border investment opportunities become both more numerous and a more significant proportion of many institutional investors’ near-term purchasing plans,” says Guilloux, “NCSSF has a chance to show them a safe and rewarding route to global exposure: fund of funds [FoFs].”

Z-Ben predicts that NCSSF is likely to issue a small but well thought-through range of RFI/RFP proposals before Chinese New Year, calling for low-risk strategies in a handful of developed markets – two each in the US, Europe and three or four in Asia – plus one or two specialised emerging markets mandates.

“Regardless of the screening process used, expect the winners to be among the largest and most experienced FoF managers available, with strong odds of two or more existing fund mandate managers winning a second bite at the cherry,” adds Guilloux.