Institutional investors urged to build up allocations in China to 20% of growth portfolios

Written by Adam Cadle

30/11/2020

Institutional investors including insurers should consider great allocations to China to benefit from the long-term opportunities the country presents and help to manage their overall risk, two research papers have suggested.

The papers, published by Willis Towers Watson, said the average institutional allocation to China is about 5% of growth portfolios. The analysis added that investors should build up an allocation of as much as 20% of growth portfolios over the next 10 years.

The research also demonstrated why asset owners should consider Chinese equities as a stand-alone allocation.

Willis Towers Watson head of advisory portfolio group, investments Asia, Paul Colwell said: “China is underrepresented in most global investment portfolios. Its size and scale make it worthy of a standalone allocation, but most asset managers lack the expertise to handle this. Yet, the China A share market offers a dynamic and broad opportunity set within a ripe market environment for institutional investors to access a new source of alpha. Skillful portfolio managers who can take a longer-term view and focus on fundamentals should benefit, but investors need to get their approach right.

“While we strongly recommend active management as the preferred way to access China, asset owners must be extremely careful when selecting their asset managers. The key is to find managers who can deliver alpha sustainably over time whilst also taking a disciplined and risk aware approach.”

Foreign ownership of Chinese onshore assets is currently low, especially when compared to other major Asian markets like India, Japan and Korea, according to the research. It said this is largely because Chinese capital markets have historically been difficult for outside investors to access.

Allocations to China in a new world order can be accessed here and The merits of a stand alone equity allocation to China can be accessed here.

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