UK Border to Coast pension targets China, EM mandates

May 12, 2020

The local authority retirement pool will select managers for A-shares and emerging market debt and equity. Head of external management Graham Long outlined the rationale.

UK Border to Coast pension targets China, EM mandates

US public pension funds may be under pressure from Washington not to invest into Chinese assets these days, but their British counterparts are not facing such obstacles.

In late April, Border to Coast Pension Partnership, a local authority retirement pool in northwest England, invited fund houses to pitch for a dedicated China equity mandate of up to £300 million ($365 million).

The fund is restructuring and ramping up its exposure to developing countries generally. It is in the process of choosing an emerging market debt manager and plans to launch an emerging market equity search in the second half of this year.

“The momentum [among UK pension funds] has certainly increased towards China investments,” said Gareth Anderson of investment consultancy Mercer’s equity manager research team in London.

“And with China being the best-performing market during the first-quarter sell-off [amid the Covid-19 outbreak]," he added, "it’s probably going to be on investors' radars even more now.” As of yesterday (May 12), China's CSI 300 was only 4.6% down since the start of 2020.

That said, most clients are content to have the China A-share weight build over time through their global emerging market managers, Anderson told AsianInvestor. “So there’s been more interest and discussion [around the asset class] but not so much action yet.”

EARLY MOVER

Hence Border to Coast is an early mover on this front, like London-based Coal Pension Trustees, which runs the retirement plans for the UK’s now-defunct coal industry and hired two A-share managers last year.

The Leeds-based pool manages portfolios for 12 local government schemes, by which it was set up in 2018. So far it oversees the management of £16 billion of the combined £51 billion held in those ‘partner funds’.

Graham Long,

Border to Coast

“We discussed with [our partner funds] to see how we could augment our emerging market offering to add a specialist China sleeve,” Graham Long, head of external management at Border to Coast, told AsianInvestor.

Chief investment officer Daniel Booth had also said in the press release: “With the increasing weight of China in the emerging markets benchmark, reflecting trends in the wider market, we felt it was appropriate to seek a specialist partner who will provide us with a local market presence.”

The China equity portfolio will initially be between £200 million and £300 million in size and managed by one or two firms, chosen with support from Mercer.

The mandate's performance target will be the FTSE Total China Index plus 200 to 300 basis points on a three-year rolling basis, Border to Coast said in a presentation on the launch of the request for pitches, for which the deadline is the end of May.

The strategy will trade both A- and H-shares (those listed onshore and in Hong Kong, respectively) and must integrate a responsible investment approach.

“We regard ESG [environment, social and governance factors] as an area of potential risk that should be taken into account in any manager’s positioning,” Long said. “We would expect them to have that aspect incorporated into their investment approach and to be able to clearly explain how it works and how they take it into account."

Coal Pension Trustees, which runs the retirement plans for the UK’s now-defunct coal industry, is another institution to have established a dedicated China portfolio.

EMERGING MARKET PLANS

Setting up a China 'sleeve' is part of a move to restructure Border to Coast's overall emerging market equity portfolio, which was launched in October 2018 with £600 million. It is expected to grow to between £800 million and £900 million by the time the China portfolio is in place.

The pool manages the non-China portion of the EM portfolio in-house through direct investment in stocks, benchmarked against the FTSE Emerging Market ex-China index.

However, it plans to launch a search in the second half of 2020 for two or three global emerging market equity managers for a separate active mandate, with a view to funding it next year. A spokesman for the pool said the portfolio could potentially include China exposure, as "nothing has been excluded yet".

As to the reason for setting up this mandate, the spokesman said Border to Coast develops its portfolio based on the feedback of its partner funds. He said he could not give any indication of the mandate's likely size.

The pool also plans to start a search to appoint four to six managers for regional developed market equity mandates next year. The structure is still being developed to take into account the investment style and alpha sources, Border to Coast said.

Meanwhile, emerging market debt will represent one of four specialist fixed income mandates, each run externally, in a multi-asset credit fund that will be launched early next year.

Border to Coast has already chosen Pimco as the core manager for the multi-asset portfolio, which will be £2.5 billion to £3 billion in size. The pension scheme is in the middle of the selection process for the other four managers, said Long.

“The vast majority [of the multi-asset portfolio] will be external,” he added. “We will be managing hard-currency emerging market debt in house.”

When it comes to the tenor of its mandates, Border to Coast tends to appoint managers on an open-ended basis, with a view to the long term. “It’s disruptive and costly to change managers,” Long said. “Our preference is to work through any issues that arise during our relationship.”

Asked whether the fund had alternative investments in Asia, the spokesman said there was a £2 billion global private market programme covering infrastructure, equity and credit assets. It expects the portfolio to exceed £5 billion in the next three to five years, he added but declined to disclose more detail.