China’s national pension fund reversed its 2022 losses, achieving a 1% investment return in 2023 despite a domestic market downturn, thanks to a diversified portfolio.

Though it ranked as the worst annual performer among state-owned investors globally, the National Social Security Fund (NSSF) maintained robust long-term investment performance, with a 10-year average annual return of 6.4%, standing out among Asian peers.

In 2023, the national pension fund recorded an investment return of Rmb25 billion ($3.5 billion), or 0.96%, including a realised profit of Rmb79.5 billion, and a loss of Rmb54.5 billion in fair value of trading assets, according to the fund’s annual report released by the National Council for Social Security Fund on October 12.

This reversed the -5.07% return in 2022. Since its inception in 2000, the fund’s average annual investment return stands at 7.36%.

“In 2023, the fund’s investment achieved positive returns, which is a result of diversified asset allocation,” the council said in a statement.

As of the end of 2023, NSSF’s total assets under management (AUM) reached Rmb3.01 trillion, up from Rmb2.88 trillion a year ago. Of this, 88.5% of assets were invested domestically, down from 90% at the end of 2022.

“Of all sovereign wealth funds and public pension funds that ended the year on Dec 31, 2023, NSSF’s return is the poorest,” said Diego López, managing director of Global SWF, a global research and data platform on state investors.

“That said, if you consider their annualised return from 2014 to 2023, both included, is 6.4%, [which] is well above the world’s average in that period, 5.6%. It has fared especially strongly among other peers in Asia,” López told AsianInvestor.

The year 2023 continued to be volatile for China’s financial market, with the CSI 300 Index dropping by 11%.

“While the domestic stock market remained sluggish with low valuations, the pension fund anchored its tactical goals and increased positions in a timely manner, laying the foundation for the fund to achieve better returns in the medium and long term, and also playing a positive role in stabilising confidence and expectations in the capital market,” the fund said.

In 2023, NSSF also optimised its asset allocation by increasing investments in fixed income and deploying assets in overseas markets to diversify risks.

The fund particularly strengthened its cooperation with overseas institutions and optimised the allocation of overseas stock holdings. By capitalising on opportunities in emerging sectors such as artificial intelligence, the fund achieved notable returns.

In the fixed income sector, NSSF observed that the domestic monetary policy remained loose, while bond yields in major foreign countries hit historical highs in 2023. As a result, the fund leveraged the high interest rates, increasing both deposits and allocations to domestic and foreign bonds, which also yielded favourable returns.

As a national investor, the pension fund continued to ramp up investments in the real economy to support major national strategies.

In 2023, NSSF allocated Rmb15 billion to establish special funds for scientific and technological innovation in Zhongguancun in Beijing, the Yangtze River Delta around Shanghai, and the Guangdong-Hong Kong-Macao Greater Bay Area. Additionally, it collaborated with state-owned enterprises, investing Rmb11 billion as a strategic investor in a COFCO project to support China’s food security. COFCO is a state-owned agricultural company.

RISING OUTSOURCE

In 2023, the weight of NSSF’s outsourced assets continued to rise, accounting for 68.8% of the AUM, up from 66.8% a year earlier. Since 2014, NSSF has steadily increased its allocation to external managers, starting from 49.74% of assets in 2014.

Chen Rupeng, head of wealth for North Asia at Mercer, noted a trend where more Chinese asset owners are considering outsourcing investment functions, especially in private assets, as they expand their investment strategies while seeking greater efficiency.

“The degree of openness and expansion varies among different asset owner groups, but this appears to be the overall direction they are heading,” she told AsianInvestor, referring to a recent Mercer report that found 41% of large asset owners globally prefer outsourcing investments management entirely.

“The investment management landscape for Chinese asset owners has changed significantly over the past few decades, and this trend is expected to continue,” she noted.

“One key change is the shift from focusing solely on ‘returns’ to aiming for ‘robust returns’ to better handle market volatility,” she added.

A POTENTIAL BULL

While NSSF provided few clues for its performance in 2024, Chinese equity has delivered strong returns year-to-date, boosted by the central government’s recent aggressive monetary and fiscal measures announced since late September. Year-to-date, the CSI 300 Index rallied 16%, transforming China’s onshore stock market from one of the world’s worst performers to a potential bull runner.

Victoria Mio, head of Greater China equities and portfolio manager at Janus Henderson Investors, noted that the market is still awaiting policy details from Beijing. She described the initial rally following the joint announcement by the central bank and regulators as a “beta rally”, where everything surged indiscriminately, and companies with weaker fundamentals might have outperformed.

“For institutional investors, that’s very difficult to participate,” Mio told AsianInvestor.

She believes it’s unlikely to see the same level of market frenzy going forward, as the market has cooled down with investors awaiting further policy specifics.

“In the second phase, we are going to see divergence in the market…shifting from beta to alpha,” she said, noting that the alpha rally is healthier, driven by good fundamentals.

“Investors will sell out those that are of poor quality. And investors [who] want to get into the market, will make use of the opportunity of the corrections to buy high-quality companies,” she said.

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