TCRS’ Aversion to China Aids Emerging Markets Portfolio

By David G. Barry

The Tennessee Consolidated Retirement System’s decision more than a decade ago to not invest in China had left its emerging markets program trailing industry benchmarks and other pension funds.

But with China experiencing economic difficulties related to COVID and crackdowns on debt and technology companies, the $67.6 billion pension fund has seen its emerging market efforts gain ground. In a presentation to the TCRS Board on March 25, CIO Michael Brakebill said that the pension fund’s “omission of China has been a drag on our performance versus broader indexes of emerging markets but that has changed over the past several years.”

In fact, TCRS said its emerging markets portfolio had an annualized return over five years of 10.2%. In contrast, the MSCI Emerging Markets Index was at 9.9%. Equally impressive is that TCRS’ annualized risk was at 16.6% versus 20.2% for the Index. Those numbers, said Brakebill, should continue to grow as TCRS’ emerging markets portfolio showed a loss of 1.15% for the period of December 31 through March 18, while the MSCI index had a loss of 8.6%.

Shelli King, TCRS’ director of communications, said the recent fall in Chinese equities has eliminated any historical underperformance that TCRS’s emerging markets portfolio previously had.

The returns that TCRS is seeing from its non-China portfolio come as other institutional investors are showing concern about China’s economy. The $250 billion Florida State Board of Administration recently announced that it has stopped funding new investment strategies in China as it assesses the risks. At the same time, others, such as Harvard University Endowment, are thinking about decreasing their investment in China, according to a Bloomberg article.

TCRS has not invested in China, Russia or a host of smaller emerging countries because of a screening methodology that the Tennessee Department of Treasury uses to evaluate nations eligible for investment in the emerging market portfolio, according to a statement by state Treasurer David H. Lillard, Jr.

Each year, according to Lillard, the department evaluates each investable emerging market country using a “Global Democracy Index,” developed by the Economist magazine in combination with an index of corruption called the “Corruption Perceptions Index,” created by Transparency International. Countries which score badly on the combination of corruption and democracy are eliminated as possible investment options. Tennessee has been using this screening method for more than a decade.

“The Tennessee Department of Treasury believes in the rule of law and democracy and that those attributes make for sound investments,” Lillard said.

According to data presented by Brakebill, the fund’s international emerging markets portfolio was valued at $2.56 billion, or 3.9% of the total portfolio. TCRS has a 3.8% target for the segment.

Taiwan accounts for 31.4% of the portfolio, followed by South Korea at 23% and India at 20%. Other countries that TCRS invests in include Brazil, South Africa, Thailand, Malaysia, Indonesia and Poland.