NAPF Investment Conference 2014: The Railways Pension Scheme aired plans to increase its exposure to emerging markets, including investment in alternatives, as it seeks further return drivers.
More than half of the scheme’s assets sit in a growth portfolio¹, which has a 15 per cent allocation to emerging markets, RPMI chief executive Chris Hitchen said today at the National Association of Pension Funds’ investment conference.
Private equity is a way to go [in China] and a way to avoid being completely constrained in state-owned corporations
Chris Hitchen
While this is an overweighting, he said, the scheme would like to increase its exposure.
Last month Pensions Expert’s emerging market debt survey found schemes investing in the asset class were diversifying in order to help offset volatility.
Emerging markets have struggled since speculation began last year about the US's plans to taper its quantitative easing programme, raising concerns among investors over liquidity and potential interest rate increases.
Hitchen also said that while only a small proportion of the scheme’s private equity exposure was allocated to emerging markets, it was a beneficial way to reap returns from the Chinese market.
“Private equity is a way to go here and a way to avoid being completely constrained in state-owned corporations,” said Hitchen.
The Chinese stock markets are uneven and it is difficult for foreign investors to get access, he added.
The scheme last year applied for qualifying investor status but the Chinese authorities' bureaucratic processes meant the scheme was forced to put these plans on hold, Hitchen said.
“It’s not a completely easy thing just to send your capital to these places even now, and I’m sure that will change in time and I’m sure we will revisit it,” he said.
Questions have been raised over the sustainability of China’s long-term growth, said Shaun Breslin, professor of politics at the University of Warwick.
This is due to the central Chinese government allowing local governments to take out new loans to bail out old loans through local government financial vehicles.
“It’s not so much a financial crisis but more a crisis of governance,” Breslin said.
Emerging market equities
The scheme is reviewing whether to increase its exposure to emerging market equities, which currently stands at 18 per cent of its equity portfolio.
“When you look at it done by risk, though, you’ll see that [developed market] equities still predominate,” said Hitchen, adding he would be happy if the emerging market allocation increased to 20 or 25 per cent.
However the scheme still has some work to do to identify return drivers, he added.
“The best way to do that, or the easiest way to do that, might be just to buy a global brands portfolio rather than an emerging markets portfolio,” said Hitchen.
The scheme’s emerging market infrastructure exposure is largely in Mexico, Hitchen said.
“We’re really seeking some sort of inflation protection to provide a long-term match of our liabilities, and that can come from overseas currencies as it can be a regular stream of income,” he said.
When deciding its exposure, the scheme looks at what can drive returns rather than seeking to gain access to more markets, Hitchen said.
¹The original version of this article, published on March 6, 2014, wrongly stated that over 50 per cent of the scheme's assets were in a diversified growth fund.
