Emerging Markets: Thinking Strategically on Your Investment Behalf

Recently, Lan Cai, Deputy Chief Investment Officer for the Pension Boards-United Church of Christ (PBUCC), was a panelist at Pensions & Investments’ inaugural Emerging Markets conference in New York City. The featured discussion highlighted investment opportunities and strategies in growth markets such as China. As a follow-up to that conversation, the Pension Boards sat with Lan to highlight PBUCC’s long-term investing approach to emerging markets on behalf of its members’ portfolios in the Annuity Plan.

 Q: With China being coined as the second-largest stock market in the world next to Japan in terms of market capitalization after the U.S., many U.S. investors believe that we are under-invested in China. In managing Annuity Plan portfolios for its members, how is the Pension Boards viewing China as an emerging market investment?  
A: China is clearly an important market. Not only does it account for about one-third of global economic growth (more than the combined share from the U.S., Europe and Japan), but it has also become one of the largest end markets. Retail sales in 2018 in China were already 91% of U.S. retail sales in U.S. dollars and have been growing at annual rate of 8.2% versus 1.6% in the U.S. over the last decade. The Pension Boards has investments in China through emerging market equity and debt managers and through developed market managers that have flexibility to invest elsewhere.

Q: How concerned should Annuity Plan members be concerning evolving trade policies such as the ongoing trade dispute between the U.S. and China? How will this impact their investment portfolios?
A: Pension Boards’ managers are currently less exposed to China compared to their portfolio benchmarks, reflecting concerns over uncertainties that changing trade policies would have on businesses and the potential negative impact on corporate profits in China. Managers are still assessing the longer-term impact on investments in China, and none have definitive answers yet given the changing rhetoric and policies. It has created some market volatilities for sure.

Q: What is the Pension Boards’ investment strategy or model when looking to invest in emerging market countries? Does PBUCC apply environmental, social, and governance (ESG) criteria to emerging markets as well?
A: The Pension Boards has dedicated investments in emerging markets from a long-term strategic asset allocation point of view. The long-term returns from emerging market investments are expected to be higher given productivity and population growth prospects and improving political environment in some countries. However, emerging markets are quite diverse, and countries do not necessarily grow at the same time. Therefore, we leverage our external managers’ expertise in selecting countries and companies in which to invest and disinvest. We also make tactical allocation changes to incorporate near-term market conditions. PBUCC also applies ESG screens to all separate account managers, including emerging market managers. In addition, we invest in private equity managers that can positively impact to emerging markets.

Q: It is anticipated that more than half of global growth over the next 10 years will likely come from India and China. How does the Pension Boards expect to leverage this growth opportunity in the Asia-Pacific market regions to positively impact portfolio growth for its Annuity Plan members?
A: Both India and China have large populations, and both have investment opportunities in consumer goods, technology, and infrastructure. As I mentioned earlier, the Pension Boards has investments in both countries through well-resourced and dedicated emerging market managers. In addition to public markets, PBUCC’s Participating Annuity can allocate to private equity, where managers are better suited to bring not only economic returns but also positive impact. For example, we have managers that are building hospitals in India and other frontier markets to improve health care access and provide employment opportunities to locals. This aligns with the values of the United Church of Christ.