UK pension schemes under-allocated to Chinese equities

Panellists from investment consultancies were asked to give their preferred allocation to China, with the results ranging from 5 per cent to 15 per cent.

Amandeep Shihn, head of emerging market equities and sustainable investment manager research at Willis Towers Watson, and James Jackson, senior equity manager researcher at Aon, suggested an allocation of 10-15 per cent, while Weichen Ding, senior associate at bfinance, said approximately 5 per cent.

Tom Hawthorn, senior consultant at Cartwright, a pension fund consultancy, plumped for 15 per cent, arguing that UK pension schemes in general were under-allocated.

You have to assess the ESG strength of your exposure manager by manager rather than making a blanket statement

Amandeep Shihn, Willis Towers Watson

He also suggested that arguments for reclassifying China as a standalone allocation, rather than an emerging market, had merit.

The panel debated whether there is a difference in performance between A-shares, generally available only to Chinese mainland citizens and specially selected foreign investors, and H-shares, which trade in Hong Kong rather than Shanghai or Shenzhen and are typically available to all.

The tight controls exercised over A-shares have been cited as a reason for the two stock types' different performances, with suspicions that A-shares are overvalued, while H-shares are typically more liquid — though the restrictions on foreign investment in A-shares have tended to relax over time.

There was some discussion as to whether institutional investors, like pension funds, should look to adopt ‘China all-shares’ strategies that include both A- and H-shares, as well as American Depository Receipts, certificates issued by US-based banks that represent shares in foreign stocks.

Ding explained that at present there are 60-70 “institutional-quality” strategies just in A-shares, and about the same number of managers benchmarking themselves against MSCI China Index, which holds around 11 per cent A-shares, 56 per cent H-shares, and 33 per cent US ADRs. 

By contrast, there are only about 20 China all-shares strategies, most of which have yet to amass even a three-year track record.

Despite this, he argued that institutional investors should consider China all-shares strategies. He said the country has the second largest economy and stock market in the world and H-shares and ADRs are dependent on the mainland.

Carving out China and ‘boots on the ground’

This led to the question of whether institutional investors and asset managers should “carve out” China from the broader emerging markets category, an idea Hawthorn said had merit but which Ding warned could only work if managers “devoted sufficient resources to covering China”.

Jackson, by contrast, did not favour separating China from emerging markets just yet. He argued it should be possible to introduce an A-share allocation “on the side” without creating too much by way of overlap.

Regardless of whether a China all-shares or a separation policy was followed, many panellists agreed that further investment in A-shares warranted “boots on the ground”, including a greater physical presence by investment managers in Chinese cities.

ESG in China has ‘a long way to go’

Perhaps understandably, given the country’s human rights and environmental records, there was consensus among the panellists that environmental, social and governance standards in China had “a long way to go”.

Aaron Costello, head of Asia at Cambridge Associates, reported seeing some reluctance from some institutional investors about increasing their exposure to China due to the reputational risk, and cited declining US-Sino relations under the Trump administration as another reason some investors had been reluctant to fully embrace the market.

Though Shihn clarified that, from Willis Towers Watson’s perspective, no investor is reducing its exposure to China; rather, some are simply slower to increase their exposure.

Costello argued that certain governance-related fears around Chinese investments had receded with the continued opening of its market. The Chinese state has shown itself less inclined to impose capital controls and seize assets, for example.

Hawthorn countered that the Chinese state has recently taken action against Jack Ma, the billionaire founder of Alibaba and a some-time critic of Beijing, to the extent of pulling the initial public offering of his company Ant Financial.

Shihn said that the country’s ESG-compliance would likely improve as its shareholder base widened, “but you have to assess the ESG strength of your exposure manager by manager rather than making a blanket statement”.