APG, with its partner E Fund, the biggest fund manager in China, is going to invest in Chinese fixed income securities. The strategy was launched under the name ‘China Fixed Income Strategy’ and increases APG’s access to an interesting market, which more and more international investors are active in. Because the Chinese standards for the environment, human rights (such as labor rights) and good corporate governance are at a lower level than in the West, it is a determining factor in the China Fixed Income Strategy. We asked Sandor Steverink, Head of Treasuries at APG AM, to speak to us about this new step.
It will come as no surprise that Sandor is positive about the newly launched strategy: “As a pension investor, we are always looking for attractive investments that provide stable, long-term and sustainable returns for our pension fund clients and their beneficiaries. In the current low yield climate, we welcome investments that have both solid returns and relatively low risk profiles. With the Chinese market increasingly opening to international investors, this is a good opportunity for us. With the creation of this strategy, together with our partner E Fund, our investment advisor for this strategy, we are expanding our investment universe in a major market.”
A fixed income strategy; what does that entail?
“In this case, we are referring to a specific investment strategy for bonds, i.e. loans, in China, without distinguishing between corporate bonds and bonds issued by local governments. This is because the boundaries between them are less defined in China. In this strategy, attention to ESG (Environment, Social and Governance) factors is important. This is standard at APG, but it is a new concept in China.”
What will it yield for our pension funds and beneficiaries?
“As stated, this type of investment yields a good profit at a low risk. In addition, this strategy offers a good worldwide distribution in your investments when you combine it with other fixed income securities. Because China, despite the further globalization, still has its own dynamic, which provides diversification in your investment portfolio, because not everything moves in the same direction at the same time. On top of that, the Chines fixed income market is a once-in-a-lifetime opportunity. A market of this scope has never before opened up in the way that China is right now. So far, China has been greatly under-represented in our investment portfolio, especially considering it is the second economy of the world. Now that the Chinese markets have opened and China is increasingly included in worldwide benchmarks, there is all the more reason for the proportion of Chinese investments to be a reflection of China’s prominent position in today’s world economy.”
How do you handle investment in a country that is controversial in terms of human rights?
“ESG is a very important factor in the strategy. Because this is a very sensitive issue with China and the ESG standards are lower there than in the western world, we have to do more research into the agencies we invest in. That is why we are starting with a more concentrated portfolio than usual, within fixed income securities, where risk-distribution is very essential. Because we are cooperating with E Fund, we have direct access to the information about these companies and agencies. We are working hard to expand the ESG information about China and this will also increase the diversification in the portfolio. In addition, reporting about ESG and Responsible investing is gaining more of a foothold in China as well, due to regulations by the Chinese governments and due to the internationalization of China’s financial markets. APG and E Fund want to be part of the vanguard of players that are part of that development. In 2016 we already joined forces with them to invest in China A-shares*, which fully comply with the requirements used by our pension fund clients for responsible investing. We are now going to do the same thing for investing in fixed income securities through the China Fixed Income strategy. We hope and expect that the Chinese parties that are issuing the bonds, will become increasingly aware of the importance of responsible investing.
We implement our clients’ responsible investment policies in all markets in which we operate, including China. This means we asses all companies we can invest in on general and sector-specific ESG criteria. Given China’s growing importance in international capital markets and the specific challenges on ESG disclosure and awareness in that market, we believe it is essential to have a strong local presence and ‘boots on the ground’. This is why we are opening up a dedicated office in Beijing and pool local expertise and experience with E Fund.”
How do you expect this strategy will further develop?
“China Fixed Income is the first allocation (allocation of capital to a specific category of investments) to China, and we are thinking that in ten years, the three biggest fixed income markets: US, Euro and China, will carry equal weight. But we are going by the principle: ‘start small and learn fast’.”
* Chinese A-shares are shares of companies that are located in mainland China and are traded in the two Chinese stock markets, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE).