Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
State Super takes the plunge with China-only mandate
The $44 billion State Super NSW fund has made its first single-country market investment outside Australia, into an ‘All China’ equities strategy managed by Ninety One. The rare allocation and precise choice of mandate were focused on risk mitigation, according to State Super.
State Super, an old NSW public service fund is closed to new members. It also includes a lot of retirees and soon-to-retire members, but has still managed to grow its assets under management over the past few years.
The fund said in a statement: “The purpose of the mandate is to effectively de-risk the portfolio using a specialist. We recognise that China is part of the emerging markets portfolio. With heightened geopolitical risk, we think it is important to appoint a specialist to mitigate the risk.”
While Ninety One has a strong capability in Asian equities from Hong Kong, London and elsewhere, including six Mandarin-speaking China specialists, the choice of a strategy benchmarked to the All China Index is seen as a further way of limiting risk.
According to Justin Cowper, Ninety One’s head of institutional business for Asia Pacific and the Middle East, the All China index has an opportunity set of more than US$10 trillion. This is approximately split between: the main Shanghai listed China ‘A’ shares, worth about US$6.7 trillion, the dual Shanghai and Hong Kong listed ‘H’ shares, worth about $2.8 trillion, and Hong Kong-only listed shares, Chinese ADRs listed in the US (the only way for foreigners to buy Alibaba, for instance, through a Hong Kong trust structure) and Hong Kong-listed Caymans securities making up the remainder. The mandate does not include the tech-heavy Taiwanese market, available through ‘Greater China’ indices.
Cowper said last week (October 22) that many Australian investors had resisted discrete allocations to the China market for various reasons, including the potential to “double up” their exposures because of Australia’s close trade ties, particularly if they hold the big mining stocks. “State Super have led the way in evolving from this thinking and seeing the potential in the China A shares market, which allows investors access to the true nature of the Chinese market,” he said.
Andrew Huang, State Super senior investment manager, said in the statement: “‘We canvassed the marketplace for equity strategies targeting an attractive segment of the global investment universe. An All Shares approach to China was the most compelling due to high alpha potential while diversifying beta. Skilled alpha hunters should thrive well in this broad and highly inefficient retail-driven market.
“We believe Ninety One’s 4Factor process is well suited for generating alpha in one of the world’s most liquid and inefficient equity markets. We believe the strategy’s focus on exploiting behavioural biases and disciplined fundamental research are important advantages for this market. During an increasingly uncertain political climate, we also required a manager with very high standards of ESG integration in portfolio construction research and corporate engagement.”
The ‘4Factor’ process, developed more than 20 years ago, refers to the four main contributors to stock selection for the strategy (not ‘factors’, as now commonly used to describe cohorts of securities which behave in a similar fashion). Ninety-one’s 4Factor process involves: ‘quality’, ‘earnings’, ‘value’ and ‘technical’. Cowper said: “The earnings and technical elements are similar to the ‘momentum factor’ as used by quant managers and ‘value’ is value.”
The All China mandate is for the strategy’s concentrated portfolio of between 30-50 stocks, giving it a higher chance of alpha generation than a broader market portfolio. It has no restrictions such as the inclusion of Chinese state-owned enterprises, which some managers shy away from. Cowper says that access is often difficult with China shares and investors cannot afford to overlook quality stocks, whether they are part-owned by the Government or not. “That is why active management is so important in China,” he said. “Not all SOEs are the same.” In recent years, SOEs have presented additional opportunities for shareholders through Government sell-downs.
Only a handful of Australian super funds have selected either single-country mandates, with the possible exceptions of the US and Europe for bigger funds, or China mandates in particular. Victorian Fund Management Corporation retains a long-held China mandate and Non-Government Schools has held one in the past. Even regional mandates are not especially common, with most fiduciaries preferring a standard global ex-Australia and emerging markets for their international equities and bond exposures.
– G.B.
