Page 20 – Top1000funds.com

As aggressive US “Liberation Day” tariffs weighed on China’s stock market, Beijing rallied its most reliable financial market troops to stop its domestic equities from nosediving.

This is the “national team”, a term loosely used to refer to government-affiliated investors.

Central Huijin Investment, a subsidiary of the $1.3 trillion sovereign wealth fund China Investment Corporation (CIC), first announced to state media on 7 April that it had increased A-share holdings. The fund declared itself as a national team investor and said it intends to “fully unleash its function as patient capital and long-term capital” to stabilise the market.

Within two days, state pension investor the National Council for Social Security Fund (NCSSF) said it would also increase its domestic equities allocation, as well as state investment managers China Chengtong Holdings Group and China Reform Holdings Corp. The funds collectively pledged hundreds of billions of yuan to invest in A-shares.

The national team first emerged as a market rescue force in June 2015 at the height of an extraordinary market rout, fuelled by a comedown in A-shares’ frothy valuation and a government crackdown on leverage, which saw the Shanghai Stock Exchange Composite Index losing 30 per cent of its value within three weeks.

Its approach has pivoted from direct share purchases to broad indices support via ETFs in recent years.

Senior lecturer at Australia’s La Trobe Business School Michael Li says the national team has played a pivotal role in maintaining the short-term health of the Chinese stock market. In a recent study examining the 2015 intervention, Li estimated that the national team’s ownership helped reduce stock crash risks by 30 to 45 per cent in the following three years.

But like any complex strategic government intervention, Li says it is possible that the national team’s actions can lead to some unintended consequences.

The network

The national team is not a defined list of investors but can include sovereign wealth funds, state investment arms, brokers, regulators and banks whose capital can be mobilised by the central government during times of market stress.

Some of the most prolific members are Central Huijin, NCSSF, foreign exchange regulator the State Administration of Foreign Exchange (SAFE) and stock lending provider China Securities Finance.

These institutions have interwoven ownership and reporting structures. Central Huijin was established by the central bank PBoC in 2003 and later transferred to CIC to effectively become its domestic equity unit – although there are “strict firewalls” between Central Huijin and CIC’s overseas investment activities.

Central Huijin acts on behalf of the central government to exercise shareholder rights in major commercial banks and other strategically important financial institutions.

China Securities Finance was owned by major market operators such as Shanghai and Shenzhen stock exchanges, who this February collectively transferred 67 per cent of their shareholdings to Central Huijin.

Meanwhile, SAFE operates under PBoC and manages the state foreign exchange reserves which at the end of this March amounted to $3.2 trillion, and NCSSF is a unit under the Ministry of Finance.

Central Huijin, the NCSSF and China Securities Finance held close to 4 trillion yuan in A-shares by the end of 2024, according to estimates from Wind data. The position represented approximately 4 per cent of China’s stock market value and is likely to have increased with recent stabilisation efforts around the US tariff. These holdings also have a significant sectoral bias as close to 80 per cent are bank shares.

The national team is an important anchor in a market like China where, according to official data, 70 per cent of equity trading is traced back to fast-moving retail money.

“Because [the national team’s] motivation, remember, is to stabilise market, not to gain profit,” Li says, but acknowledges this could have some negative short-term effects.

“Generally speaking, because the share price should be determined by its fundamental value like cash flows and other economic factors, the purchase of these national team investors will temporarily distort the share prices,” Li says.

“It’s not good for the overall market because it reduces the informativeness of the share price… it contains these deliberate trading.”

In the long term, while these rescue efforts likely do not have negative impact on A-shares – as the temporary boost from the national team will wear off and prices will revert to reflect fundamental value – it’s also hard to determine if they’ve contributed to the development of a more mature stock market or better beta, Li says. The MSCI China A index has had a zero per cent 10-year return despite volatile performance.

Goldman Sachs’ China equity strategist Fu Si told Chinese financial press that the national team acts more as a safety net and expected the buying to slow down after the market stabilises, while a sustained market recovery needs to be driven by improvements in consumption and real estate.

Global influence

While short-term asset price stabilisation is important, Li suggests it needs to work with government stimulus to boost investor sentiment should the US-China economic conflict escalate.

But the national team’s domestic influence is only part of the story as some members are prolific global investors, and there are already signals that the Chinese government is seeking to exercise the funds’ influence to exert pressure on the US.

Some of the state-backed funds are looking to exclude private equity investments in US companies, even if they are made by investment managers based outside of the country, the Financial Times reported on Tuesday.

CIC was among the investors reportedly pulling back from the US. The fund allocated close to half of its portfolio in alternatives at the end of 2023, which is the latest disclosure, which makes it one of the world’s largest investors in the asset class.

It seems that the national team is an important leverage for the Chinese government to not only maintain peace in the domestic market but also fight economic war overseas if needed. With no end in sight for the tit-for-tat trade war and little willingness from both sides to negotiate, balancing the duties of global investments and national interest will be a complicated subject for these sovereign investors in the near future.

The $34 billion Khazanah Nasional, the sovereign wealth fund of Malaysia, has been increasing its public and private equity exposure to developed markets for the past eight years.

It is a pivot away from its traditional focus on emerging markets, including its home country and other Asian economies, that was made somewhat out of necessity because underperformance in the past decade was hurting returns.

As of this March, the US accounted for approximately 40 per cent of Khazanah’s global portfolio, and it has plans to increase overall developed countries exposure to in line with the MSCI ACWI benchmark at 88 per cent.

But while the allocations are increasing chief investment officer Hisham Hamdan is very realistic about what the fund can and cannot achieve by allocating to developed markets. He sees it as sufficiently rewarded beta but not the place to look for an edge and is “spending more time on allocation, less on selection”.

“That’s one thing that I think most organisations need to ask themselves, do you really believe that you can outperform the index in efficient developed market countries?” Hisham tells Top1000funds.com, adding that it is why Khazanah prefers to access developed markets via cheaper and passive options.

As of the end of 2024, 57.5 per cent of Khazanah’s main investment portfolio was domestic public markets,17.4 per cent was global public markets, 16.5 per cent was private markets and 8.6 per cent was real assets.

In contrast, emerging markets is where Khazanah wants to take on active risks due to inefficiencies, but the problem in these countries is that higher risks and volatility haven’t been rewarded with higher return. The momentum in developing economies, which accounts for two-thirds of the world’s GDP growth, also has not translated into higher company earnings. And this creates a dilemma for investors like Khazanah located within the region.

Khazanah has traditionally had a high allocation to China, but investments in the country in particular have come under significant strain since 2021, following a slow COVID-19 recovery and the real estate market crash.

India however, where the fund also has an office, has been the bright spot in emerging markets with strong returns in public markets, Hisham says.

The last decade of emerging markets performance has been “out of whack”, Hisham says, but he still believes investing in emerging markets will bring higher returns over the long term. Khazanah itself has a role to play, as Malaysia’s sovereign wealth fund, part of its responsibilities is to invest in and help develop its domestic equity markets and promote economic activities in its home region.

So despite the momentum of the past few years, and an increasing allocation to the US and other developed markets, uncertainties in US markets supercharged by tariffs could signal an opportunity to allocate more to emerging markets, which are showing signs of rebound. Notwithstanding fear of a trade war with the US, China’s benchmark CSI 300 index has still outperformed the S&P 500 in 2025 so far.

“If you are a US-centric [allocator], chances are you are probably underweight emerging [public] markets. Maybe instead of having 12 per cent [in EM], you have 7 or 8 per cent,” Hisham says. “If you see China has done well this year, maybe it’s time for you to pivot.”

“That depends on who the fund is and where they are, but we are obviously happy to see China’s numbers coming back.”

On the private equity side, it is reducing exposure to venture capital and increasing buyout and secondaries investments. “Private equity is definitely higher active risk than public market, but the dispersion of return is wider,” Hisham says.

“Increasingly, the median return of PE is not beating the public market benchmark, it could also be because the public [market] has been very strong because of the Mag Seven.

“We always invest into an asset class, [where] if the risk is higher, you want to make sure that the risk is rewarded.”

Compared to its global sovereign wealth fund peers, Khazanah’s $34 billion of assets under management is modest, and it doesn’t have the luxury of inflows from resource revenue or access to foreign exchange reserves, but its existence is closely linked to the prosperity of the Malaysian market where the fund plays a role to improve its beta.

Hisham considers that Khazanah’s mandate could be likened to a combination of three Singaporean sovereign and state investors, GIC, Temasek and the Economic Development Board (EDB). It needs to juggle between transforming Malaysian listed companies, developing new economic sectors and bringing foreign capital into the country alongside the government, while ensuring a globally diversified portfolio and meeting return targets.

The overall Khazanah portfolio has four components. Apart from around $31.5 billion in the main investments portfolio with commercial return targets, $1.3 billion is allocated to the ‘Dana Impak’ fund which executes investments around six socioeconomic themes such as healthcare and food security; ‘developmental assets’ which are companies that Khazanah is helping to strengthen their financial sustainability; and ‘special situations’ where assets are under stress and need active management to improve profitability.

“Some of the things that we do, you don’t necessarily get the return. The return can be captured in the form of jobs that we created, in the form of new skill sets [in the economy] that we created,” he says.

“But at the same time, we have to make sure that we generate those cash returns, pay dividends to the government and take care of our balance sheet.”

The investment methodology Total Portfolio Approach (TPA) is making big waves at the moment.

Funds in large numbers are thinking about ways to make the transition to TPA with CalPERS the most prominent, as covered in Top1000funds.com recently. But the paradox is that not much money is run this way yet. My estimate is that only about one-third of the very big funds and well under 10 per cent of mid and small funds do TPA. What’s the back-story?

Strategic asset allocation (SAA) grew up in the 1980s, turning the horse-race of outperforming peers into a more intelligent race against benchmarks. It did that well but more as a comfortable arrangement that solved a governance problem than good investment design. I was there and I worked on it. This was when asset and liability management (ALM) and risk budgeting were proving their mettle which to this day are valuable tools for asset owners.

But as risk became more complex and stakeholders more demanding, it fell behind par in meeting performance goals. In short, like a lot of things, it worked well until it didn’t. And when a few brave souls in the 2000s went against it and evolved the TPA methodology, we had what looked like a better model.

Fast forward 20 years – where are we? The change has been small-scale. TPA is still in a minority position largely because it can only be implemented with a type of stretchy governance that is both very capable and nimble to make a good job of the transition an ongoing challenge. And that type of governance is in very small supply.

It hasn’t helped that the industry is conservative (that’s ok) and has an aversion to change (that’s not so good). And there has been no burning platform to mobilise change. The TPA ask is onerous and a transition to TPA needs the stars to align. On top of a change to the investment model, you need changes to the people model, risk model and governance model, and often the sustainability model too.

These multiple asks led the Thinking Ahead Institute to design the TPA scale that adds up to a TPA signature. That signature runs from the pure SAA (score 0 on TPA-scale) to pure TPA (score 5 on TPA-scale). The big asset owners interestingly are often in a hybrid model where they have some of the TPA features, but retain some of the SAA features (so they are 2 or 3 out 5). The TPA exemplars – four are often mentioned: CPP, Future Fund, NZ Super and GIC – are 4 or 5 out of 5. The benchmarking of TPA follows from these pillars.

First, in the investment model there is the goal-oriented framework moving from success as the outperformance of benchmarks to success in a scorecard centred around meeting goals in a multi-factor orientation that is systemic not fragmented

Second, in the risk model the mindset shift is from volatility and tracking error to the downside and drawdowns from the total portfolio and the risk tolerance that drives the yin and yang of risk and return. The TPA method is supported by risk measures that are wider, softer and longer than the equivalents in SAA.

Third, in the people model there must be a stronger teamwork ethos and collaborative proposition straight from the superteams playbook (see Top1000funds.com) by governing better via effective scaffolding and working smarter via better culture, T-shapedness and cognitive diversity, all motivated by a mind-set shift.

Fourth, in the governance model the best boards are strategic not investment strategy-focused, and highly tuned to speed, agility and joined-upness principles.

Finally, in the sustainability model it’s applying the joined-upness in practice – integrating risk from ESG onto the portfolio, risk from the portfolio onto the real world, and integrating their intentional impacts both short- and long-term.

There is no killer app here, but it is critical to work with some governance guidelines and guardrails to thrive in a more complex world experiencing rapid cultural evolution, technological transformation, environmental degradation and a dose of political dysfunction.

The big driver to better governance is first about basics: dependency on division of roles, comparative advantage, primacy of goals, speed of action, culture of collaboration and critically checks and balances. And second, it’s about ‘ologies’. Here the methodology, technology, futurology and anthropology are critical to making sense of the present and the future and reflecting that sense in the current portfolio.

This way of thinking aligns in the normative picture of organisational maturity captured in the scientific, speed and superteams principles spelt out in Andrew McAfee’s book, The Geek Way. The book explores how the tech industry applies those organisational principles to produce the exceptional results that the Mag Seven and others in the Silicon Valley set have achieved.

The rapid progress that geek companies have made can be traced back to organisational innovation and their high rates of learning through applying speed in all facets of the business, notably the commitment to and system for learning.

Humans do not learn primarily by studying. We learn primarily by watching the people around us, finding those who are good at what they do, and picking up on their behaviour and integrating the best bits.

The application to investors is clear: the best have the greatest intelligence processed from basic data into collective intelligence at speed and scale. And TPA works by streamlining that process.

Making the TPA transition needs this stretchy governance. Stephen Gilmore, CIO at CalPERS in his public account of their TPA plans lays out a path forward. There is no silver bullet. Just a well-ordered series of steps starting with the vision and strategy, the common purpose, the unified language, the competition for the best ideas for capital and risks, through to implementation using multiple channels, and reinforced in a culture shift. And all this shaped by a building body of experience that this is a transition worth making waves for. Because asset owners need help with a faster world that has higher stakes and considerably more uncertainty.

Roger Urwin is global head of investment content at WTW.

Scotland’s £31 billion ($41 billion) Strathclyde Pension Fund, which manages the pension assets of 288,000 local government employees in the Glasgow area, is increasing its allocation to impact to 7.5 per cent of assets under management.

The new allocation gives the internally run direct impact portfolio (DIP) an additional £1 billion to target new investments with local, ESG impact over the next five years spanning SME private credit, growth equity, infrastructure, affordable housing and renewable energy. The pension fund said measurable impacts from DIP include 177,000 tons of CO2e emissions avoided, enough to power 317,000 homes.

The boosted allocation marks the steady growth of a portfolio that Strathclyde created in 2009 with an initial £5 million investment and a capacity of just £300 million. The investor was one of the first in the Local Government Pension Scheme (LGPS) to commit explicitly to investing for impact. Most recently, the portfolio produced an annual return of 4.1 per cent. It has returned 7.6 per cent annually since 2010.

The DIP’s returns compare very favourably against Strathclyde’s overall returns, although DIP tends to lag total fund performance because of its much lower equity allocation.

In its latest committee meeting, the Strathclyde board also agreed to an increase in the minimum targeted return for individual fund proposals in the DIP allocation to 6.5 per cent from 5 per cent. The portfolio now targets investment sizes of £30 million to £100 million and plans to increase the total amount of the co-investment programme to £300 million from £200 million. It will also increase the maximum individual co-investment ticket size to £25 million.

Highest funded level ever

In another important milestone, the pension fund has just posted its highest funding level ever recorded of 147 per cent.

“The triennial actuarial valuation is always a significant milestone in the evolution of a pension fund. But the 2023 valuation of Strathclyde Pension Fund was particularly so,” it stated.

“These are not just actuarial and accounting numbers. They translate into real-world value: reductions in employer contribution rates for SPF’s employer’s whose finances are currently hard-pressed; and reassurance for the Fund’s 286,000 members (another high-water mark) that their pensions are more secure than ever even in these difficult times.”

It has also been a good year for investment returns. The pension fund has returned 9.9 per cent for the year, increasing assets under management by £2.7 billion. Ten-year investment returns are 8.5 per cent. The growth-oriented portfolio is divided between a 52.5 per cent allocation to equity, while hedging/insurance (1.5 per cent,) credit (6 per cent,) short-term enhanced yield (20 per cent) and long-term enhanced yield (20 per cent) make up the rest of the portfolio.

The fund’s strong performance also facilitated some strategy changes which the committee agreed on towards the end of last year, including a reduction in investment risk in order to add more protection against future downturns and a shift of more than £4 billion of passive equity into Climate Transition Index funds. “This marked a a big step towards making the Climate Action Plan agreed by the committee last year a reality this year,” stated the fund.

Members received a pension increase of 10.1 per cent at the start of the year and will have received a further increase of 6.7 per cent after the year end, ensuring that the value of their pension is fully protected against inflation.

Strathclyde is part of the Local Government Pension Scheme (LGPS) and is one of 11 LGPS funds in Scotland.

Texas Teacher Retirement System, the $211.6 billion Austin-based pension fund, has an asset allocation that is built to withstand the “extraordinary times” and adverse climate investors face today, reassured CIO Jase Auby, speaking during the latest update at the fund.

A 21 per cent allocation to stable value wholly tasked with maintaining value even during “pre-recessionary times, if you believe we are on a path to recession” has proved most robust.

All four asset classes comprising real and nominal government bonds and hedge funds have remained positive proving a “ballast” that the fund depends on as it navigates the impact of negative GDP and corporate earnings news, weak demand and a flight to quality.

“The markets are highly volatile. It’s worthwhile emphasising how our asset allocation is built to last and weather storms like this,” said Auby.

The pension fund’s 57 per cent allocation to global equity comprising public equity (45 per cent) and private equity (12 per cent) was down about 7 per cent reflecting the sharp fall in the S&P 500 which has experienced its third largest fall in post WW2 history. “The two other times were during the GFC,” said Auby.

The impact of recent volatility on TRS’ real return allocation that includes real estate (15 per cent) and energy, natural resources and infrastructure (ENRI) is more difficult to gauge because the portfolio is private and not mark to market, he said. However, the energy allocation that includes oil and natural gas has suffered falls in oil, but positive returns in gas.

The risk parity allocation was down but still “holding its own.” This portfolio seeks to deliver the same level of return but do so with less emphasis on the equity market.

Poised for the offensive

Auby told trustees the fund has maintained its standard rebalancing processes through the market turmoil.

“At this point in time, we have no insight or special information on how [Trump’s tariff polices] will role out, so the best alternative is to rebalance and be as close to the benchmark as we can possibly be. But we also recognise there will be a time for offence, and to go back into the public equity market if there is a draw down to a substantial degree.”

Typically a drawdown of around 32 per cent signposts recession, and he said only at this point would TRS consider “going on the offence” and pause rebalancing so rigorously.

“When it’s time to play offense we’ll do so.”

He added that TRS’ overweight to private markets has been offset by depressing the All Country equity allocation. Last year, TRS has rolled out a new SAA that includes an increased long-term target allocation to public equity from 40 per cent to 45 per cent. It combined regional portfolios into a $70 billion all country allocation; a $9.6 billion portfolio of non-US developed market equities and a $1.9 billion emerging market allocation that fully excludes China and Hong Kong in line with new Texas laws.

TRS recently experienced the high level departure of Mohan Balachandran after 17 years at TRS where he came to lead multi asset strategies. Auby said attrition, which had been low, has recently spiked with 12 members of the investment team leaving so far this year.

Staff resignations have led to a restructuring of the teams that implement public market quantitative strategies. A new quantitative equity group will continue current stock selection strategies, but TRS has reduced assets in internal quantitative equity strategies by approximately 60 per cent with the intent to grow them back as appropriate.

In another note, TRS has ended its working from home policies with staff now in the office five days a week.

“The parking lots are full,” said Auby.

I believe biodiversity loss is one of the top global risks in terms of its impact and likelihood, yet it is completely overshadowed by climate change and is not well understood.

Six out of the nine planetary boundaries that define a “safe operating space for humanity” have now been exceeded and there is increasing pressure on all nine boundaries, or processes, that regulate the stability and resilience of the Earth system. There is now undeniable evidence that economic growth at the expense of the environment and the biosphere is unsustainable in the long term.

Climate transition encompasses and affects several different areas, which are all interdependent and together form a complex network or system. Targeting and thinking about one area in isolation, therefore, may produce negative impacts on other parts, potentially resulting in more harm than good.

Achieving net zero emissions is a critical goal for combatting climate change, however reversing the decline of biodiversity is equally vital for human survival and flourishing. Without a wide range of animals, plants and microorganisms, ecosystems will not survive. We rely on ecosystems to provide us with food and air, materials we wear and use to build our homes with. Hence biodiversity is essential for all life on Earth, including humans.

Among the main threats to biodiversity are climate change, pollution, habitat loss, overexploitation of species, and invasive species.

The relationship between biodiversity and climate change is complex. Biodiversity plays a key role in regulating the climate through carbon sequestration, maintaining healthy ecosystems, and supporting resilience to climate change impacts.

Effective climate action can enhance biodiversity by promoting the preservation of habitats and ecosystems. However, there is a potential scenario where the race to achieve net-zero emissions could inadvertently harm biodiversity.

For instance, the rapid expansion of renewable energy infrastructure or large-scale monoculture for bioenergy could disrupt natural habitats and threaten native species. Aggressive reforestation efforts without considering local ecological needs may lead to the introduction of non-native species that can harm existing biodiversity. The energy transition relies heavily on critical minerals, and extraction tends to have serious environmental and social consequences.

It is essential therefore that while pursuing the goal of carbon neutrality, we consider its effects on other dimensions and make sure we don’t compromise biodiversity in the process. Considering climate change in isolation is potentially dangerous because it overlooks the intricate relationship between climate and biodiversity, both of which are crucial for sustaining life on Earth.

The ‘do no harm’ principle plays a vital role in ensuring that climate action does not inadvertently damage natural habitats or the species that depend on them. We need sustainable approaches that simultaneously address both issues to ensure a holistic and effective response to environmental challenges. Our efforts to address climate change and biodiversity must ultimately be net positive to ensure their long-term sustainability.

Achieving positive, viable outcomes will depend on our ability to embrace the fact that we are part of a system where all components are interconnected, and their interaction creates the life as we know it. In practice, this also means that climate change efforts require collaboration among all stakeholders, where every perspective is significant and additive.

As the climate and natural environments continue to change, the interactions between them evolve, presenting challenges and opportunities that are difficult to anticipate. This is a dynamic relationship with potential tipping points, further shifts in climate and irreversible damage to the planet. Our lack of understanding or ability to predict these events with any degree of accuracy underscores the need and urgency for action and careful consideration of our approaches.

The biosphere is the foundation of economies and societies and the basis for all of the United Nations’ Sustainable Development Goals (SDGs). Nature loss threatens financial stability and poses a systemic risk which is likely to impact increase volatility and financial returns in the future.

Addressing biodiversity is a challenge for the investment industry. Investment organisations already have limited governance budgets, there is a lack of reliable data and it’s difficult to measure the impact of investments on biodiversity. The Taskforce on Nature-related Financial Disclosures (TNFD) incoming biodiversity regulation aims to enable financial institutions to integrate nature into decision-making, but still a lot needs to be done to ensure investor actions have a positive real-world impact.

In practice, investment organisations have different levels of ambition when it comes to biodiversity. At one end, there is compliance with regulatory requirements and TNFD reporting.

Moving beyond compliance, there is risk management and mitigating potential threats to portfolios. At the other end of the spectrum, some organisations take on a more proactive role by financing transformative projects aimed at restoring biodiversity and rehabilitating ecosystems. A systems-based approach is at the heart of these projects, with stakeholders collaborating to solve the challenge to generate positive outcomes in the long term.

Climate change and biodiversity loss are both critical global risks, in terms of impact and likelihood of occurrence. The interplay between them forms a complex and interdependent system that cannot be effectively addressed in isolation.

Recognising this interconnectedness is crucial, as failing to consider the mutual influences between climate and biodiversity could lead to incomplete and potentially harmful strategies. Addressing biodiversity loss requires integrated efforts across all sectors, acknowledging the profound and multifaceted relationships that sustain our natural environment. Only through such a holistic perspective can we hope to mitigate the risks and secure a sustainable future for our planet.

Anastassia Johnson is a researcher at the Thinking Ahead Institute at WTW, an innovation network of asset owners and asset managers committed to mobilising capital for a sustainable future.