At long last the global institutional investment world – that is the western pension fund world – is starting to invest in China. According to bfinance, the international manager search and consulting firm, the recent Chinese policy initiatives to attract professionally managed money are starting to have effect.
Justin Preston, bfinance senior director and head of equities and public markets, said on a recent visit to Australia that there were now more than 60 fund manager strategies investing in the China ‘A-Shares’ market. This is the Shanghai share market which, despite its increasing size (about three times the size of the Australian market), remains a retail-driven speculative-type market.
Preston says that the Hong Kong ‘Stock Connect’ initiative, subsequently extended to Shenzhen on the mainland, coupled with the widening inclusion of China’s public markets in the global MSCI indices, has provided institutional investors around the world with better access to what has become the world’s second-largest economy.
He says: “We’re seeing, globally, a continued trend to more diversification, both from an overall business perspective and also within the equities market for fund management. Investors are looking more at emerging markets and also Asia Pacific. More recently, we are seeing clients allocating to China A-Shares.”
The bfinance search and consulting firm is also seeing more so-called ‘systematic’ managers coming into the China sphere, Preston says. “Because of the retail investor dominance [in China A-Shares] there are more inefficiencies that managers can exploit. Also, the domestic managers tend to have a short-term focus.”
There are some “interesting” boutiques starting to come out of China too. The western world, for once, appears to be amenable to partnering with local Asian talent rather than imposing its own processes and strategies on, largely, unwilling recipients.
According to Frithjof van Zyp (Fridge), who established bfinance’s Australasian office, each Australian super fund, as with pension funds around the world, tend to be different and need to be treated differently. They have different requirements and every manager search is a bit unique, he says.
bfinance recently produced a paper on the China market for investors, which says that about 20 per cent of the China A-Shares market is now owned by foreign investors. For the managers involved, this is a great opportunity because China is way behind the west in the fees it charges. The bfinance paper says that the “median quoted, pre negotiation” fee for a US$50-100 million mandate for China in a segregated account is 80bps. This is at least twice what a manager could expect for investing in Australian or other western-country stocks. Also, the foreign managers investing on the market are adding more value above the index than they can do in other major markets.
Justin Preston also says that the investor appetite for diversification includes increased interest in international small caps – not just in the emerging markets such as China. It’s all about adding value, giving their clients alpha, he says. “This is an intellectually challenging industry. We spend a lot of time talking to clients about their investment management preferences.”
– G.B.
