The Florida State Board of Administration will not make new investments with Chinese firms, it announced in March.
According to the Institutional Investor, the Florida SBA has invested $250 billion in retirement accounts, and nearly $5 billion is with companies based in China.
In December, Gov. Ron DeSantis urged caution in dealing with China.
“I would like the SBA to survey the investments that are currently being done,” he said in a release. “When the legislature comes back they can make statutory changes to say that the Communist Party of China is not a vehicle that we want to be entangled with. I think that that would be something that would be very, very prudent. I also think that our country as a whole, but certainly Florida, would like to see more production and manufacturing re-shored, and we would be a great place to do that.”
DeSantis said in December he had “moved to revoke all proxy voting authority that has been given to outside fund managers, to clarify the state’s expectation that all fund managers should act solely in the financial interest of the state’s funds, and to conduct a survey of all of the investments of the Florida Retirement System to determine how many assets the state has in Chinese companies.”
Nell Bowers of the Office of General Counsel to the State Board of Administration of Florida, provided information on SBA investments in China to DOL Newswire.
A March 21 memo on China investments from Lamar Taylor, interim executive director and chief investment was sent to DeSantis, Chief Financial Officer Jimmy Patronis and Attorney General Ashley Moody.
“The vast majority of the public market China exposure, totaling $4.905 billion out of $4.981 billion, is in publicly traded equity securities within the Global Equity (GE) Asset Class,” the memo stated. “GE is the pension plan’s largest asset class, and 10.9% of the asset class is invested in emerging markets. The SBA has been investing in dedicated emerging markets strategies since 1994 as emerging markets provide a diversifying source of returns for the pension plan.
“Over time China has become a larger component of emerging markets specifically and global markets more broadly as the Chinese market structure and economy has evolved," Taylor added. "From a sector perspective, the pension plan’s global equity China holdings are spread among 11 separate sectors, with greater concentrations in consumer discretionary, financials, communication services and industrials.”
Almost all the investments, $4.863 billion or 99.2%, is held through 31 separate external investment managers hired to implement global, developed market and emerging market investment strategies on behalf of the SBA, according to the memo.
The memo said the managers are chosen through “a rigorous, policy-driven investment manager selection process, involving numerous investment and operational due diligence staff of the SBA as well as an external investment consultant.
“Once selected these managers are contractually bound to exercise a fiduciary standard of care with respect to their investment activities on behalf of the FRS, which imposes on them the same duty of substantive and procedural prudence and loyalty imposed on the SBA itself,” the memo added
The investments are protected by setting rigorous, exacting standards, according to the memo, including source code controls, backup and security measures, with models implementing their strategies undergoing stress tests.
“Emerging market managers have investment staff who continuously monitor developments in China and Asia more broadly in order to better and more timely determine and react to the investment impact of those developments,” it states. “Layered on top of this diligence is the SBA’s own external manager oversight processes which includes, among other things, daily portfolio compliance monitoring, numerous quarterly calls and manager meetings as well as a quarterly review of all external managers with the SBA’s external investment markets and managers consultant.”
The pension plan’s public market exposure to Chinese companies comes from fixed income ($12 million) and real estate ($64 million). It also is diversified, with $785 million invested with Chinese companies in more than 50 limited partnerships or similar investment structures, according to the memo.
The memo states that extreme caution is taken to reduce risks to the investments.
“In sum, the SBA understands and appreciates the serious concerns raised about the Chinese Communist Party and the SBA’s investments in Chinese companies,” the memo states. “As fiduciaries, the SBA and its external investment managers are required to take into account the risks inherent in the investments we make. The SBA and its managers also ensure compliance with all applicable laws prohibiting investing in certain Chinese companies.
“To this end, the SBA maintains extensive screening and compliance processes to ensure portfolios remain compliant with all applicable laws prohibiting investment in companies, including laws that prohibit investments in companies that operate in the defense or related materiel sector or surveillance technology sector of the People’s Republic of China or holding companies thereof.”
During a December investment advisory council meeting, Alison Romano, the SBA’s deputy chief investment officer, said “We see opportunity there, but we are still very aware of the risk in China. We are only invested in China through active managers who pick their spots based on the world situation, based on those individual company dynamics, and in total, we have less than 3% exposure at the total fund level.”
Florida SBA’s federal counterpart, the U.S. Small Business Administration has been the subject of criticism over its entanglements with China. Notably, as reported by the Washington Policy Center, the SBA gave well over $400 million in PPP money to Chinese-owned companies. Florida Sen. Marco Rubio has also publicly criticized the SBA’s relationships with China, having previously introduced legislation that would prevent SBA funds from going to any Chinese citizen.
