Thomas Lee, the chief investment officer at the New York State Teachers’ Retirement System, put it succinctly: For U.S.-based asset owners, China “is the elephant in the room.”
For months, endowments, foundations, and pension funds stateside have been grappling with growing tensions between their home country and China, which is home to the second-largest global economy.
Opting out of investing in the region could help them avoid the kind of write-downs that some asset owners were forced to take amid Russia’s invasion of Ukraine. But if that tail risk never comes to fruition, they may also miss out on opportunities to reap the benefits of investing in such a massive market.
Lee and his team at NYSTRS have a roughly two percent allocation to the country, primarily through global index funds. While the pension system is concerned about geopolitics, it’s still active in the region, Lee said.
“As a large U.S. public pension plan, we’re aware of these dynamics, but the real issue is that China is the second-largest global economy in the world,” Lee said. “The implications of a deterioration in the global capital flows and trade flows will definitely impact a large fund like ours.”
Lee spoke at the Alts NY conference on Wednesday, alongside Paula Volent, CIO of Rockefeller University, Andrew W. Mellon Foundation CIO Scott Taylor, and John Bowman, executive vice president at the CAIA Association.
Volent believes there are still opportunities in China, although the tension between the country and the U.S. is still top of mind. She pointed out that just a few weeks ago, Sequoia Capital, one of the largest U.S. venture firms, said it would break off its Chinese business into a separate entity — a move symbolic of a greater split between the two nations.
Despite these issues, Volent feels that there is room to invest. “I think China is investable,” she said. “I think some things in environmental and clean energy are interesting. Around some of the semiconductor industry, there are tensions. I do think China is a world force that we have to consider in our portfolios.”
While Rockefeller is exploring options in clean energy and other sectors in the region, Taylor is taking a tempered approach. In his view, the investment thesis in China has “changed materially.” When that happens, he said, asset owners should take a moment and perhaps rethink their allocation strategy.
“While it’s very investable, if you’ve found yourselves overweight, it’s probably time to get back to center and to a place where you can withstand a tail event,” he said. “While a tail event is remote, it’s more likely than it was five years ago.”
Still, capital is pouring into the country.
As Lee put it: “The view as an American looking at China, where it seems to be high risk and low growth, [is that] the capital flows are going into China from the rest of the world. Because U.S. investors aren’t investing in China, the rest of the world is.”
