Navigating New Horizons: Minnesota SBI’s China A-Shares Mandate
Balancing Opportunity and Risk in the World’s Second-Largest Economy
The Minnesota State Board of Investment (SBI) has strategically positioned itself to tap into the growth potential of China’s domestic economy through its China A-Shares Mandate, a dedicated strategy within its International Equity pool. Managed by Earnest Partners and benchmarked against the MSCI China A Index, this mandate provides onshore, RMB-denominated equity exposure, complementing SBI’s broader overseas investments in developed and emerging markets. As of March 31, 2025, the International Equity pool accounts for 24.4% of the $149.7 billion Combined Funds, reflecting its significance within SBI’s portfolio. This essay analyzes the structure, rationale, manager selection, performance, risks, and allocation context of the China A-Shares Mandate, offering a holistic view of its role and potential impact.
1. Mandate Structure and Placement within SBI’s Portfolio
The China A-Shares Mandate is embedded within the International Equity pool, a key component of SBI’s $149.7 billion Combined Funds, representing 24.4% of total assets as of March 31, 2025. Unlike offshore Chinese equities (e.g., H-Shares or ADRs), A-Shares are traded on the Shanghai and Shenzhen exchanges and denominated in RMB, providing direct access to China’s domestic market dynamics. Managed by Earnest Partners, the mandate tracks the MSCI China A Index, aligning with SBI’s goal of enhancing its international diversification. This strategy complements other overseas mandates by offering exposure distinct from traditional emerging and developed market allocations, positioning SBI to benefit from China’s unique economic trajectory.
2. Rationale for China A-Shares Exposure
SBI’s allocation to China A-Shares is driven by a compelling trifecta of diversification benefits, access to high-growth sectors, and favorable market conditions.
Diversification Benefits: China A-Shares exhibit low correlation with U.S. and broader emerging market equities, making them a valuable diversifier. Over the past three years (to September 2024), the MSCI China A Index returned -7.9% per annum, underperforming the MSCI ACWI’s +8.7%. However, over a 20-year horizon, it has delivered a robust 7.5% annualized return, closely aligning with global equities. This long-term resilience, paired with low correlation, strengthens the portfolio’s risk-adjusted returns.
Access to “New Economy” Leaders: A-Shares provide exposure to domestic-oriented sectors such as technology, consumer goods, healthcare, and new energy—areas often underrepresented in offshore indices. These sectors include smaller-cap companies with significant growth potential, and the A-Shares market’s inefficiency, driven by retail investor dominance, creates opportunities for alpha generation through skilled stock-picking.
Policy and Valuation Tailwinds: Recent stimulus measures from China, including targeted infrastructure investments and consumer support, aim to bolster economic stability and market sentiment. Coupled with A-Shares trading at a historically wide discount to their long-term averages, these factors suggest potential for valuation mean-reversion, enhancing the mandate’s upside potential.
3. Manager Selection & Investment Process
SBI selected Earnest Partners for its expertise in navigating the complexities of the A-Shares market, leveraging an integrated investment process tailored to China’s unique environment.
Top-Down Analysis: Earnest Partners employs a macroeconomic lens, assessing currency trends, policy shifts, and regional dynamics to shape portfolio positioning. This approach ensures the mandate capitalizes on China’s evolving economic landscape.
Bottom-Up Analysis: The firm conducts rigorous fundamental research, evaluating company financials, corporate governance, and ESG risks specific to China’s onshore regulations. This dual-track process is critical in a market prone to opacity and regulatory volatility.
Benchmark: The mandate tracks the MSCI China A Index (net), which includes large- and mid-cap stocks across the Shanghai and Shenzhen exchanges, adjusted for free-float. This benchmark ensures broad representation of the A-Shares opportunity set.
Earnest Partners’ on-shore research platform further enhances its ability to identify mispriced securities and manage risks, making it a fitting choice for this mandate.
4. Performance & Fees
The MSCI China A Index’s performance reflects both short-term volatility and long-term potential:
Year-to-Date 2025: The index has risen approximately 16%, fueled by optimism in the technology sector and renewed stimulus discussions, signaling a potential turning point.
Historical Context: Over the trailing three years (to September 2024), it posted a -7.9% annualized return, impacted by regulatory crackdowns and economic slowdowns. Conversely, its 20-year annualized return of 7.5% underscores its capacity for sustained growth.
Fee Structure: While SBI does not disclose specific fee details, active A-Shares mandates typically range from 0.50% to 0.75% in management fees, with possible performance fees tied to benchmark outperformance. This reflects the specialized expertise required to manage this complex market.
5. Risks & Oversight
Investing in China A-Shares introduces distinct risks, balanced by SBI’s robust governance framework:
Market Access & Liquidity: Access has improved via Stock Connect, replacing older quota-based systems like QFII/RQFII. However, daily quotas and trading restrictions can still limit liquidity, particularly during volatile periods.
Regulatory & Governance Risks: China’s regulatory environment remains unpredictable, with abrupt shifts—such as tech crackdowns or data security rules—posing volatility risks. Corporate governance in the A-Shares market can also be opaque, heightening the potential for mismanagement.
Currency Risk: As A-Shares are RMB-denominated, fluctuations in the USD/RMB exchange rate introduce an additional layer of uncertainty, necessitating careful risk management.
SBI Oversight: The Proxy Committee ensures alignment with ESG and fiduciary guidelines, overseeing voting and engagement to address governance and ethical concerns in line with Minnesota statutes.
6. Allocation in Context
The China A-Shares Mandate does not have a fixed allocation within the International Equity pool, where Earnest Partners competes with approximately 15 other managers. An equal weighting would imply each manager oversees about 1.6% of the Combined Funds, but SBI adjusts allocations based on conviction and capacity. As a result, the actual exposure to A-Shares is likely a low single-digit percentage of total assets. This measured approach reflects a balance between capturing China’s growth potential and mitigating its inherent risks.
Conclusion
The SBI’s China A-Shares Mandate is a forward-thinking strategy that enhances portfolio diversification, accesses China’s “New Economy” growth drivers, and positions the fund to benefit from potential valuation recovery. Earnest Partners’ integrated approach and on-shore expertise enable SBI to navigate the A-Shares market’s complexities, delivering long-term value despite short-term challenges. While risks such as regulatory uncertainty, liquidity constraints, and currency volatility require vigilant oversight, the mandate’s strategic importance lies in its ability to complement SBI’s broader international exposure. As China’s domestic market continues to evolve, this mandate underscores SBI’s commitment to engaging with one of the world’s most dynamic economies, balancing opportunity with prudent risk management.