Australia’s second-largest superannuation fund, Aware Super, will no longer consider China as an investment destination in its upcoming overseas expansion due to concerns over its behaviour and market efficiency in the country.
Aware Super runs a $140 billion (US$109 billion) fund and is currently on track to grow the assets under its management to $200-300 billion (US$156-230 billion).
Aware Super’s Chief Investment Officer Damian Graham announced the news at a Bloomberg Inside Track webinar on Feb. 8 after noting that China’s authorities and markets have fallen short of the company’s expectations and pose a significant risk to minority shareholders.
“Three or four years ago, I thought that they were becoming more westernised in their capital markets, but I don’t think that is the journey they are on,” Graham said. “The government has been fairly overt about that to say ‘We’ve got our way of doing things’ and that’s their right, but it means as a minority investor you need to pause a little bit at the moment.”
The stance represents a correction to Aware’s original strategy that saw it in 2017 become the first Australian super fund to secure a QFII (Qualified Foreign Institutional Investor) license in China. The fund subsequently allocated an initial US$500 million (AU $640 million) to buy Chinese shares and an additional $US 350 million($270 million) to acquire private equity.
In 2018, Graham also unveiled plans to double the fund’s $1 billion exposure to China, a move based on the expectations of a continued opening up of the Chinese economy and the “further sophistication of their capital markets as they are looking to evolve their interaction domestically and globally”.
This focus has now shifted towards other locations.
“We’ve been considering what our geographic spread will be,” Graham said. “China is certainly not where I’d start.” He indicated that any new overseas office would be in Europe or the United States.
Aware Super’s reassessment of China reflects the fallout of the current diplomatic tension between China and Australia, which started last April following Foreign Minister Marise Payne’s call for an inquiry into the origins of the CCP (Chinese Communist Party) virus, commonly called the novel coronavirus.
The tension has seen the Chinese Communist Party deploy tools of economic coercion against a wide range of Australian industries, prompting more Australian businesses, including some financial institutes like Westpac to reduce their exposure to China or diversify their supply chain.
Many Australian Super Funds Still Keen On China Despite Risk
While Aware’ s stance resonates with Australia’s geopolitical risk, many Australian super funds are still keen to deploy more capital to China for higher yields while turning to external fund managers to mitigate risks.
In July 2020, AustralianSuper, the country’s largest superannuation, selected an external fund manager to run its dedicated China A-share strategy. In its annual meeting on October 27, the chief investment officer Mark Delaney confirmed the ongoing interest in China, identifying it as a growth area for the fund.
When asked about his view on how the tension between Australia and China was playing out in the investment market, Delaney said the tension was unlikely to be sustainable, and China was still considered as a desirable destination.
“When we consider China, it’s an enormous market and there are some fantastic companies there which we would like to invest in,” he responded. ”It’s still a destination point for us for making capital returns for members.”
Opening its Beijing office in 2012, the $182 billion fund has grown its exposure to China from $1.4 billion to $4.6 billion over the last five years, with more than $1 billion invested in tech giant Alibaba and $750 million in Tencent, the owner of WeChat messaging app.
Another smaller fund, State Super NSW fund also announced last October it had awarded an All China Equity mandate to Ninety One (formerly Investec Asset Management), in an attempt to mitigate the risks while taking advantage of a “broad and highly inefficient retail-driven market.”
“The purpose of the mandate is to effectively de-risk the portfolio using a specialist,” the fund said in a statement. “We recognise that China is part of the emerging markets portfolio. With heightened geopolitical risk, we think it is important to appoint a specialist to mitigate the risk.”