Institutional investors should take total portfolio approach to China – WTW

Written by Adam Cadle

20/04/2021

Using a total portfolio approach and active management of Chinese assets will allow institutional investors gain the long-term diversification and expected return benefits from adding these assets without a negative impact on their overall sustainability profile, new research has shown.

Willis Towers Watson (WTW) research said that although Chinese capital markets provide diversification benefits and attractive alpha opportunities for global investors, substantial challenges on the sustainable investment front have made investors cautious at the same time.

The total portfolio approach considers each risk factor in aggregate across the whole portfolio rather than just within each asset class. This framework allows investors to reduce exposure to assets that have negative sustainability characteristics elsewhere in the portfolio and increase allocation to Chinese assets that have better ESG momentum and better overall risk and return potential. Alternatively, increasing exposure to assets that have positive sustainability characteristics, for example investments in climate solutions, can be used to balance the overall sustainability profile.

WTW said skilled active management can significantly reduce risk exposures related to poor ESG practices that sometimes can be encountered in China. When selecting investment managers, there needs to be a strong emphasis on their ESG integration and stewardship practices.

“Sustainable investing is not just about properly integrating ESG-related information for risk management purposes,” WTW investments research team director and China project lead Liang Yin stated.

“It is also about recognising that long-term ESG-related themes, such as climate change, can create return opportunities. China has in recent years emerged as a world leader in funding and developing technologies to combat climate change and its net-zero pledge will greatly influence economic and climate policies in the decades to come. Moving forward, we expect China to be a major source of climate change driven investment opportunities.”

WTW head of advisory portfolio group, investments Asia, Paul Colwell, added: “We strongly believe that skilled active management should be front and center of any institutional implementation solutions to access China. Given the current state of China’s SI development, we do not recommend a blanket allocation across Chinese assets.”

Scenario analysis by WTW has suggested that Chinese assets may build up to 20% of global investor growth portfolios over the next 10 years. Despite recent progress made by policymakers in opening up China’s domestic capital markets, the average institutional allocation to China remains at a low level of around 5% (of the growth portfolios).

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