Institutional investors signal shift to dedicated China equity investments

Written by Adam Cadle

07/04/2020

One-fifth of institutional asset owners plan to increase or significantly increase their dedicated allocation to China’s equity markets in the next three to five years, latest research has shown, but many continue to hold back due to low trust in China’s government (67%) , negative perceptions of corporate governance policies (65%), and questions about market access (49%).

Crafting the Optimal China Allocation Strategy: The Asset Owner's Perspective, published by Greenwich Associates, said that as China has become a larger portion of global indices over the past several years, some investors are taking a fresh approach with a dedicated China allocation to maximise diversification and potential alpha-generating benefits for their portfolios. Traditionally, investors have accessed China through global emerging markets.

As asset owners compile their China portfolios, it is expected that broader ESG considerations will play an increasingly important role. Forty-five per cent of study participants overall view ESG factors as influential criteria.

“This study highlights an important opportunity for institutional investors regarding China’s equity markets,” Matthews Asia portfolio manager and CIO, Robert Horrocks said.

“These results show a disconnect between perception and reality on key issues like corporate governance. China has embarked on a program of reforms to make markets more investable, transparent and accessible.”

To overcome China’s opaque corporate governance standards, the report said many asset owners are turning to experienced asset managers. Managers with specific expertise regarding the China market (specifically those with an on-ground presence), combined with factors such as risk management capabilities and an investment team with long-term success investing in China, can alleviate these concerns, articulate how to appropriately consider and manage the risks and highlight the potential benefits of the direct investment approach, the report added.

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