By Muskan Arora
States around the US, are taking the initiative to
divest from China and prohibiting pension plans from making new allocations.
However, in a surprising turn of events, the
second-time-President Donald Trump held off on imposing tariffs on China during his first day
back and did not single the country out as a threat. Furthermore, he also delayed the ban on the Chinese-owned short video app TikTok. This might be indicative of a new beginning.
While that still remains a question, multiplepension plans chimed in to divest from China last year.
At the January 10th investment
meeting of $23.15 North Dakota Retirement and Investment Office, the CIO and
staff, discussed their China exposure, how the portfolios are structured,
how they might be structured in the future and what the impact of any China
divestment mandates might be.
In 2023, pensions plan in Florida, Texas, Kansas and Oklahoma divested from China after governors of the state raised concerns.
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“Governor Greg Abbott of Texas sent a letter to state agencies prohibiting them from making any new investments of public funds in China and directing them to divest their current holdings at the first available opportunity,” as stated in the North Dakota meeting materials.
Kansas received a countries of concerns
divestment bill which stated divestments from China, Cuba, Iran, North Korea,
Russia and Venezuela within two years.
However, due to the size of the Chinese economy,
its exposure to the markets and its prominence in the indexes, it is difficult
as a fiduciary to exclude China from the portfolio if there is no directive
from U.S. Treasury or legislation.
Further, if there is a China mandate in place –
it would need to specify the regions and would have to allow plans time to
divest to minimize transaction cost impact.
“Without grandfathering of existing private
markets China investments, there would be a high cost of exit even for
portfolios that have a very small exposure,” stated the meeting materials.
This led most pension plans to begin
considering different options to manage their international portfolios.
Two main options highlighted by North
Dakota include Separately Managed Accounts (SMAs) and a Fund of One platform.
Through SMAs, the system uses indexed and Global Depository Receipts (GDRs) to gain exposure to markets that have not been yet opened. This approach would
allow the system to have direct custody of assets, a cheaper option, and it can
be implemented immediately.
However, SMAs would limit market access and
limit strategies which can impact returns, and it also takes time to open
markets.
The Fund of One platform would allow the
pension plan to identify a third-party vendor, which would help with a faster
access to the market and potential to offset some costs including fee
negotiations.
However, this approach would also mean an
additional fee to the third-party vendor, additional administrative and
operational fee along with complex/less direct control.