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Director of FSSA Investment Managers Vinay Agarwal has warned investors against drawing comparisons between China and India just because the two have similar market sizes and populations. And despite India’s sky-high valuations, Agarwal argued that the country’s solid market structure and culture will make it worth investors’ while.
FSSA is a part of Mitsubishi UFJ-owned First Sentier Investors and Agarwal’s merit includes Indian Subcontinent strategy and Asia-Pacific equities investments in general.
He told the Top1000funds.com Fiduciary Investors Symposium in Singapore that from an equity perspective, many people considered India now to be where China was 20 years ago, but one of the most important differences is their level of resilience.
“China has been on such a massive, positive run for decades now that the companies there have not gone through a prolonged tough period, whereas in India, it’s always two steps forward one step back,” he told the crowd.
Indian companies had to negotiate with conditions such as complex requirements from close to 30 state governments and lack of infrastructure. But most importantly, there is limited access to capital, whereas Chinese companies get to enjoy readily available state-directed capital.
“Capital consciousness is far higher,” he said.
“Our engagement with these [Indian] companies is always about composition, remuneration, succession, quality of financials – all those things that help us establish whether something is quality or not…which is in most cases is lacking in China.”
Worth the price?
The MSCI India Index traded at 22 times price to earnings this week, which is ‘nosebleed valuations’, according to Anuj Girotra from the $500 billion Canadian pension investor CPP Investments.
About $5 billion of the fund’s $20 billion Asian active equities strategy is allocated to India, which Girotra oversees. The market-neutral, pure-alpha portfolio focuses on public equities, PIPE deals and pre-IPO opportunities in the consumer, healthcare, financials and technology domains, which Girotra said is a level of flexibility needed to invest in India.
“India is still a relatively shallow market, you can’t build a very deep business if you’re only doing publics or only doing privates,” he said.
Girotra encouraged investors who think the Indian markets are too expensive to look at valuations from another perspective.
Despite having more than 5000 listed companies in the country, he said after applying some reasonable market cap, liquidity and return on equity thresholds, in the past 10 to 15 years most growth equity investors around the world have probably been chasing only 20 companies.
“And a ton of capital foreign capital has been coming into India, which explains why most of us anecdotally believe India is very expensive,” he said.
Agarwal said India’s valuations, despite being substantial, are worth it. He added that its companies’ earnings are also less lofty compared to those in China, for example.
“When you look at the earnings of Chinese companies, easily 20 to 25 per cent of the profits are subsidies, which are given by provincial governments or central governments,” he said.
“When you take that out, the earnings will be a lot lower, and the premium will be a lot higher when you’re comparing China to India.”
Growth ahead
Looking ahead, the next event bound to have an enormous market impact is the imminent Indian general election, according to geopolitical consultant and Veracity Worldwide managing director Ben Weiss.
The ruling BJP party’s confidence in maintaining its position means that the policy and regulatory environment will likely stay on the same trajectory as the past decade, which is not a bad thing, Weiss said.
“The stock market in India during that period of time basically tracked the US stock market. At the moment, they are showing 8 per cent GDP growth,” he said.
“One thing that has marked the BJP’s time in power under Prime Minister Modi has been significant easing of business, both on the financial investment side and certainly on the corporate side. You see a lot of red tape go away.”
There are also many government efforts done to bolster the economy and infrastructure, he said, including a ₹7 trillion ($84 billion) rail project in the latest budget.
India’s tension with China is “not unspoken of” as a rationale for investment into the country, he said, and it has created many initiatives in Western countries such as the U.S.-India Critical and Emerging Technologies Initiative (iCET).
However, Weiss warned investors might want to be wary of India’s “democratic backsliding” over the last 10 years.
“The BJP has taken a very heavy hand when it comes to things like controlling media and the flow of funds to NGOs that happened to be critical of his government.
“There’s some questions around the independence of some of the courts, so still a number of real issues.”
Pictet’s Geneva-based chief economist Patrick Zweifel remains bullish on the outlook for China, suggesting that stabilization of macro factors and “promising cyclical development” will breathe life into the market of world’s second-largest economy.
The comment came amid a particularly weak stretch for the Chinese equity market. The MSCI China Index return was down close to 14 per cent in the past year as at the end of February 2024, compared to a 9.2 per cent gain for the MSCI Emerging Markets for the same period.
But at this week’s Top1000funds.com Fiduciary Investors Symposium in Singapore, Zweifel said he remains confident in China amid fluctuations because the country never really lost sight of its end goal.
“China has always wanted to be part of the global economy, and wanted to internationalize its currency, which was pretty much its ultimate goal,” Zweifel told the symposium.
“I always analyze China in relation to that goal, which hasn’t really changed.”
Zweifel said a prerequisite for achieving that goal is for China to stabilize its currency and inflation, which in turn created a favorable environment for bonds. He pointed out that Chinese bonds have by far outperformed their US counterparts.
“The problem was [the] equity market – they just didn’t care about it,” Zweifel said.
“But I’ve always again thought that it would start to matter as soon as the equity market themselves starts to challenge this ultimate goal of internationalizing the Renminbi.
“And I think we’re just right there. Everyone has lost confidence in the equity market, and they are currently doing everything to reform and boost investor behavior – not only domestically but internationally – to rebuy in that equity market.”
Stabilization ahead
According to a Pictet analysis, the main macro factors behind Chinese equity fluctuations (construction activity, home prices, world real export, trade-weighted USD and commodity prices) are largely still real estate indicators.
“Even if we don’t know exactly the future of the real estate market in China, most of the correction is actually behind us, and we would expect some sort of stabilization going ahead,” he said.
“It’s unlikely to have further decline on the Chinese equity market linked by that factor.”
Meanwhile, “promising cyclical development” such as inflation growth is moving into positive territory and will in turn propel nominal GDP growth, Zweifel said. This, combined with an ongoing government reform that aims to make state-owned enterprises more friendly to stakeholders and distribute more profit, will likely lead to earnings growth.
There is ongoing debate in the industry about whether emerging markets can technically be classified as an asset class. Zweifel was of the view that it is, but a highly heterogeneous one.
He recommended three ways of considering emerging market countries for investment, the first one being commodity exporters versus manufacturers; the second one being debtors versus creditors; and the third being China versus the rest of emerging markets, due to the sheer size of its economy and heavy dependence on domestic factors.
“It makes very much sense to be active [in China],” Zweifel said.
“It makes especially more sense to be active in economies that are very rapidly changing structurally.
“I mentioned that past performance of China was highly linked to real estate market – I don’t think that the future in China will be a real estate market.
“They have rebuilt pretty much everything. The future is… high tech – AI, lithium battery, you name it. You need to be active and forward looking to be in those in those countries.”
In a pivotal moment for Japan’s financial landscape, plans by the Government Pension Investment Fund (GPIF) to widen its scope of asset managers have reverberated through domestic markets. With GPIF president Masataka Miyazono’s announcement at the forefront, the world’s largest pension fund embarks on a strategic journey, challenging traditional selection criteria and signaling a shift in investment strategy as Prime Minister Fumio Kishida aims to elevate the standard of the country’s asset owners.
Comments by Miyazono, the president of the world’s largest pension fund, at his media conference on January 19, 2024, captured the attention of market experts and media. He announced plans to open the public pension fund to more asset managers while eliminating certain criteria used in selecting asset managers, such as the minimum scale of assets under management and the number of years of experience in servicing financial products.
GPIF previously required an asset manager company to hold more than 100 billion yen in assets under management. The public fund also mandated that an asset company’s investment product must have at least 30 billion yen in assets with a track record of five years. However, the GPIF has scrapped these numerical criteria, stating it will accept applications from investment management institutions with “a sufficient track record”.
This change has led to assumptions that GPIF will open its door to more asset managers and has raised speculation that it could support the government’s plan to introduce the emerging managers program this summer. The government is aiming to set up a framework to allow newer asset management companies to enter the market.
However, the fundamental understanding stays in place among many fund managers responsible for public pension funds that any public pension fund, including GPIF, will require an asset management company to hold at least 100 billion yen in assets and would require a track record of at least three years.
Enhanced qualitative evaluation
The public fund aims to enhance its quantitative evaluation process, which will streamline the selection procedure for asset managers. Kishida envisions transforming Japan into a wealth management powerhouse, with his government urging pension funds to allocate funds to up-and-coming asset managers. Miyazono emphasized that GPIF’s shift should not be interpreted as aligning with the government’s policy goals, although experts in the industry do not perceive it that way.
“Both GPIF and other asset owners, including corporate pension funds, share a common fiduciary responsibility,” explained Katsuyuki Tokushima, head of pension research and ESG development at NLI Research Institute. “The key question revolves around whether GPIF can confidently entrust a large pool of its funds to an asset manager with a limited track record. We are closely monitoring how GPIF navigates this challenge while enhancing its fiduciary duty.”
Tokushima further elaborated that GPIF’s intention to broaden its manager base holds significance not only for the fund itself but also bears great importance for other asset owners, given its implications for Japan’s future and the government’s objectives.
GPIF’s investment strategy tends to influence other asset owners, corporate pension funds and other institutional investors in Japan amid the public pension fund’s substantial asset size and its role in managing the country’s national pension system. For instance, its asset mix policy, which is reviewed every five years, is closely monitored by Japanese and global market participants, including asset owners.
In recent years, the GPIF has undergone reforms aimed at enhancing transparency, governance, and sustainability in its investment practices. These reforms include incorporating environmental, social, and governance factors into investment decisions and promoting responsible investing practices.
CONSIDERABLE INFLUENCE
GPIF stands as the world’s largest pension fund, managing around 220 trillion yen or $2 trillion in assets. As a key player in global financial markets, the fund’s investment decisions can have significant implications not only for Japan’s economy but also for international investors and markets. Its asset scale gives it considerable influence, often inviting thorough examination from a wide range of financial experts and policymakers in Japan and worldwide.
The GPIF, which started managing funds in 2001, operates under the jurisdiction of Japan’s Ministry of Health, Labour, and Welfare. GPIF makes investment decisions based on the policy asset mix of 25 per cent each in domestic and foreign equities, and domestic and foreign fixed income. The current policy asset mix, which started in April 2020, shall meet the investment objective of a real investment return (net investment yields on the pension reserve fund less the nominal wage growth rate) of 1.7 per cent with minimal risks. GPIF reviews it every five years and this year marks the year when it decides its new policy objective this year to be implemented from April 2025.
The GPIF’s massive size and significance stem from its role in managing pension reserves for various public employees and workers covered by Japan’s national pension system, making it a crucial financial institution in the country’s retirement landscape.
In recent years, the GPIF has undergone reforms aimed at enhancing transparency, governance, and sustainability in its investment practices. These reforms include incorporating environmental, social, and governance factors into investment decisions and promoting responsible investing practices.
Around 90 per cent of Japan’s public pension system is funded through premiums and government funding. GPIF, which covers the remaining 10 per cent, is only meant to serve as a supplementary source of funding. Still, greater returns by the fund help strengthen the system. In 2014, GPIF increased its allocation target for equities to 50 per cent from 24 per cent, concerned its previous strategy centered on Japanese bonds would not lead to the returns it needed. It also increased its target allocation of foreign currency-denominated assets to about 50 per cent from about 40 per cent in 2020, further positioning itself to benefit from current market conditions.
PAST AND LATEST DELIBERATIONS
GPIF took the most significant asset allocation shift reform during Prime Minister Shinzo Abe’s administration, in 2013 and 2014. Under “Abenomics”, the GPIF successfully revamped its asset allocation strategy by significantly increasing investments in equities, while slashing its allocations to Japanese bonds which stood at almost 70 per cent before 2013. The fund also adopted a stewardship code, reinforcing its commitment as a long-term investor. Notably, these series of reforms enabled the GPIF to attract top-tier investment professionals from prestigious financial institutions globally, including the current chief investment officer Eiji Ueda, formally a director at Goldman Sachs in Japan, as well as President Miyazono, formally at Norinchukin Bank.
The latest ambitious strategy by the Kishida administration seeks to elevate the asset owners, including GPIF’s standards. He emphasizes the importance of asset managers and owners to enhance their skills and governance structures. As part of this initiative, Kishida plans to establish principles by this summer, defining the roles of pension funds and insurers in ensuring appropriate returns for beneficiaries. Transparency, especially from corporate pension funds, will be a key requirement in this endeavor.
Kishida said in a speech at the Economic Club of New York last September that he aims to boost competition in Japan’s $5 trillion asset management industry, urging new market entrants to convert dormant household savings into investments. He emphasized the government’s commitment to shifting 2,000 trillion yen of household financial assets into investments, with half currently held in cash or bank deposits. Kishida also said to promote sophisticated asset management and attract new players to the sector, noting a 50 per cent increase in funds over the last three years to reach 800 trillion yen within Japan’s asset management sector. But he said there is more to be done as healthy competition in the asset management industry is meant to generating higher investment returns for household, which translate into higher spending and corporate profits.
A former GPIF executive suggested that GPIF’s latest initiative to expand its pool of asset managers could potentially enhance its beta generation by diversifying its investments into alternative assets. “With assets exceeding 220 trillion yen, GPIF essentially becomes a universal owner in the global market, making it challenging to generate alpha,” explained the former executive. “Therefore, the focus shifts towards improving beta. This was one of the strategies we implemented back in 2014 by allocating funds to the JPX 400 Index.”
Moving forward, GPIF is seen shifting toward a more active asset management strategy after Miyazono told at Bloomberg’s Buyside Forum in October that GPIF is in the process of selecting active Japanese stock funds using quantitative and scientific methods. The state pension fund has been selecting active funds for North American and developed country stocks excluding Japan since the fall of 2022. Only 6.9 per cent of domestic equities that GPIF owns are managed by active funds.
Furthermore, GPIF’s plan to expand the managers could stimulate investment in alternative assets, which the portfolio in that field only accounts 1.4 per cent of the entire assets or 2.83 trillion yen since it first started investment 10 years ago and sharply below the investment target of 5 per cent, the former GPIF executive said.
“GPIF’s investment in alternative assets is progressing slowly, but its plan to expand managers could stimulate investment in this asset class,” he said, adding that its current investment in real estate, private equity, and infrastructure are managed through gatekeepers.
STRONG PERFORMANCE
GPIF boasts that it has generated a cumulative return of 132.4 trillion yen or a rate of return of 3.99 per cent on an annualized basis since the pension fund started investing in 2001.
The latest results show that the pension fund booked a record calendar year gain of 34.31 trillion yen in 2023, buoyed in large part by a rise in Japanese stock prices, according to Nikkei.
The fund saw investment returns of 5.73 trillion yen in October-December, amounting to a 2.62 per cent gain, as indicated in GPIF’s quarterly results announced on February 2.
GPIF’s total assets under management grew by roughly 20 per cent in 2023 to 224 trillion yen as stock prices rose at home and abroad. A weaker yen also boosted the value of foreign assets in yen terms.
Global financiers and asset owners are closely monitoring every move that GPIF makes, including their investment results and strategies. The state fund’s plans to broaden their manager selection would have a significant impact on the domestic industry.
“Public and corporate pension funds and other asset owners are closely watching GPIF, but they don’t have to do the same,” said NLI’s Tokushima. “But it will certainly make it easier for them to hire managers if GPIF actually opens the door to expand its manager selection.”
Migros-Pensionskasse (MPK) the CHF28.2 billion ($30 billion) pension fund for Switzerland’s largest retailer, Migros, has just posted returns of 3.7 per cent. MPK CEO Christoph Ryter told Top1000funds.com the below median performance, at least compared to MPK’s peers, was mostly attributable to its allocation to poorly performing local and international real estate that together amount to around 32 per cent of assets under management. The local portfolio returned 0.2 per cent and the international allocation -1.3 per cent.
The latest results contrast to last year when MPK’s high strategic allocation to real estate helped mute the impact of losses in equities and bonds and was the main reason the fund performed better than peers. Still, back then Ryter predicted gains in real estate valuations would begin to vanish, or turn negative.
Ryter isn’t planning any changes in the portfolio ahead of an asset liability management study this year. Conducted every four years, it will inform strategy from the beginning of 2025. MPK’s other allocations comprise nominal value investments (32.8 per cent of AUM) equities (27.7 per cent) and gold (2 per cent) as well as a 5 per cent allocation to infrastructure that sits in the property allocation.
Real estate woes
MPK divides its real estate portfolio between a larger, direct investment portfolio in Switzerland managed internally (comprising around 300 properties) and a smaller international allocation comprising fund investment and collective vehicles. The bulk of the domestic real estate allocation is invested in rental apartments where valuations and demand are usually supported by the increase in the number of people coming to live in Switzerland and a strong renting culture.
One challenge to the strategy in recent years has been finding enough properties in Switzerland to fill the target allocation. Buying and selling is slow, and finding projects and securing permits time-consuming.
MPK has made much progress preparing the real estate allocation for climate change. Strategies include replacing fossil fuel heating with heat pumps and connecting to a district heating network. However, Ryter said although real estate is one of the best asset classes to have an impact on cuttingemissions, it is also important to consider costs when integrating sustainability in real estate, and balancing costs with adding value.
Other initiatives include reducing resource consumption by better aligning consumption to changes in tenant behavior. Another initiative includes investigating the impact of improving insulation and airtight windows, and introducing LED lamps.
The pension fund reports that tenants’ need for charging options for electric vehicles continues to increase. New buildings take this trend into account from the planning stage. For existing properties, MPK will retrofit where necessary. Some 44 properties (14.8 per cent) have over 100 parking spaces with electric charging stations.
Rising interest rates have improved MPK’s coverage ratio, currently 129.4 per cent compared to 124.5 per cent in 2022. Meanwhile, MPK reported administrative costs per insured person are CHF 100.4 while the asset management costs were 35.1 centimes per CHF 100 of assets.
The number of insured people at the end of 2023 was 80,500 (300 more than in the previous year) of which 29,600 were pensioners.
International Women’s Day has come around again and still the stats are not good. The pay gap still exists, there are still too few women in C-suite positions and women have less savings in retirement. So what are you going to do about it?
There are still systemic problems in the structure of western society that mean women are being disadvantaged throughout their working lives, and subsequently into retirement.
This is not just an individual person’s story, it is bad for the economy and all of us, regardless of gender. This year the United Nation’s International Women’s theme is Count Her In: Invest in Women. Accelerate progress, which highlights that closing gender gaps in employment could boost GDP per capita by 20 per cent globally.
This year in the UK women make up 56 per cent of enrolled university students, there are more women enrolled at Harvard than men (51:49) and in Australia, women currently make up 59.5 per cent of all completed university degrees. This is all good news.
But while more women are graduating than men, those statistics do not flow through to the workforce in terms of senior positions or pay.
Across the global financial services sector, women make up only 18 per cent of C-suite positions and on the current growth rate this will be only 21 per cent in 2031. The CFA Institute – often seen as a proxy for the investment industry – shows women represent just 19 per cent of members globally.
According to PwC’s Women in Work 2024, the average gender pay gap across the OECD actually widened from 2021 to 2022, despite women’s participation in the workforce rising. The report shows that in the UK women earn 90 pence to a man’s £1.00, even accounting for similar personal and professional backgrounds.
In Australia, where I live, women in financial services face one of the highest pay gaps of any industry (only behind construction) according to the latest gender pay gap study by the Workplace Gender Equality Agency.
The study looked at the 302 financial and insurance services firms in the country and found men on average earned $139,845, and for women it was $103,308 – a 26.1 per cent industry gender pay gap in favour of men. And further, in Australia the median superannuation balance for men aged 60 to 64 years is $204,107 whereas for women in the same age group it is $146,900, a gap of 28 per cent.
So if more women are graduating than men, we need to ask why there is still the pay gap (when we know closing that gap is good for GDP), and why women don’t make it to the higher echelons of the workforce, and why they have less in super.
One of the contributing factors is that the division of domestic labour continues to fall heavily on women (in heterosexual couples). This means women’s careers are interrupted, they are balancing more of the home/work priorities often leading to part time work, or they are overlooked for promotion/don’t put themselves forward. Sometimes this is by choice but often it’s because there is no alternative, or no perceived alternative.
Studies by the United Nations during COVID (when men were at home) and then post COVID have revealed that women take on 70 per cent of informal care and housework demands, which is all unpaid and very time consuming. Put another way women spend about three times more time on unpaid care work than men according to the UN, which says if these activities were assigned a monetary value they would account for more than 40 per cent of GDP.
So let’s get real about the conversation. Are we talking about equality or equity? Are we fighting for an equal playing field – will that ever happen? Or should we be addressing the issue face on?
My personal view is the key to change is addressing the systemic, structural gender stereotypes that disadvantage women.
All of us can do things to change this: put pressure on policymakers to value and recognise the value women make to economies through unpaid care work – initiatives like the suggested paid superannuation on maternity leave in Australia; be prepared to step outside your comfort zone, and challenge your own biases; personally take on more of a load around your own households; be conscious of stereotypes, call them out and be active in changing them.
Hire more women.
Happy International Women’s Day. Next year let’s have something to celebrate.