The main US federal pension fund has decided to switch to a benchmark index that will effectively exclude investments in Hong Kong. Souring US-China relations were cited as one of the primary drivers.
The Federal Retirement Thrift Investment Board will switch the benchmark index for its international fund to the MSCI All Country World ex-USA ex-China ex-Hong Kong Investable Market Index next year, according to a statement. The fund is currently benchmarked against the MSCI Europe, Australasia and Far East Index.
Following the move, the fund, which manages $771 billion in assets for nearly 7 million American federal employees, will effectively exclude investments in Hong Kong. Prior to this, it was already excluding investments in mainland China.
Increased Risk
In its statement, the Federal Retirement Thrift Investment Board quoted a note by consultancy firm Aon on rising risks for the international fund (I Fund) while investing in China, including restrictions on sensitive tech sectors, delistings and Russia sanctions.
«These types of unforeseen events can incur transaction costs and may cause performance and volatility swings. Given the asset size of the I Fund, the forced selling or restricted investments could incur higher than average market impact costs due to liquidity challenges,» the note said.
«If the current investment restrictions on China are the beginning of further restrictions spanning China and Hong Kong investments, this level of uncertainty can outweigh the benefits of expanding the I Fund to include China and retaining exposure to Hong Kong, based on the [Thrift Savings Plan’s] specific circumstances.»
