SIOUX FALLS, S.D. — Gov. Kristi Noem is continuing her work to decouple South Dakota’s pension fund from the Chinese economy, penning a May 16 letter to Vanguard asking the asset management megafirm to offer an emerging markets option that leaves out Chinese investments.
In addition to a related note to the South Dakota Investment Council on the same day, the letter to Vanguard CEO Mortimer Buckley builds upon a spree of activity late last year, when Noem wrote a similar letter to Vanguard and asked the investment council to review its direct investments for any ties to Chinese companies.
This time, Noem’s inquiries were joined by three other governors: Kim Reynolds, of Iowa; Greg Abbott, of Texas; and Tate Reeves, of Mississippi.
The council’s review of direct investments last year found a small number of ties to individual companies that were quickly sold, liquidating around $1.4 million of the state’s $19 billion investment fund, State Investment Officer Matt Clark told the Associated Press at the time.
Noem’s renewed inquiry for a China-free emerging markets index fund from Vanguard — a bundle of investments in “emerging” countries like China, Taiwan, Brazil, India and Saudi Arabia — looks to address another, much larger tie between the state pension and the Chinese economy.
ADVERTISEMENT
“We must find opportunities to stop the flow of funds going to the [Chinese Communist Party], and our taxpayer-funded investments are the right place to start,” Noem wrote on May 16 in a letter to the investment council asking them to take advantage of an emerging markets fund without China if it becomes available.
Disclosures to the Securities and Exchange Commission as of the end of March show the state holds about $635 million worth of the Vanguard emerging markets index fund, one-third of which is invested in China, the largest single recipient of these funds.
Investment in China through this index represents just over 1% of the investment council’s total portfolio, which includes the retirement system and a handful of other, smaller funds.
In response to Noem’s first Vanguard letter last December, Daniel Reyes, the principal of the company’s Portfolio Review Group, wrote “we have received client inquiries about this type of product in recent months and have begun reviewing this product-type pursuant to our process.”
Noem suggested the investment council move state funds to a different manager if Vanguard does not create a fund sans China.
The combination of letters authored by Noem shows her main reasoning behind calling for divestment is the “infiltration” of the CCP into the United States: her recent letter to Vanguard proffers examples such as TikTok’s 150 million monthly active users in the United States, the growing purchases of American farmland and the Chinese spy balloon that made headlines earlier this year.
However, for some state lawmakers — the officials who most directly oversee the investment council — keeping political and financial decisions in separate worlds is best for the state’s pension holders, who include teachers; state and municipal employees; and state and municipal law enforcement officers.
“It has intentionally not been a political body. And I don't see any reason for turning it into a political body since it's done really well being apolitical,” said House Speaker Hugh Bartels, of Watertown, who served on the South Dakota Investment Council a decade ago. “The fiduciary duty to the pension holders is really the prime consideration that we need to work through.”
ADVERTISEMENT
The South Dakota Investment Council’s 2022 annual report shows the fund has earned a net annualized return of 9.9% since 1974. About three-quarters of the fund is managed internally by investment council staff.
Full decoupling may mean moving beyond Vanguard, rubbing against state law
Even beyond the emerging markets vehicle Noem mentioned in her letter to the Vanguard CEO, Noem’s desire to “fully insulate” the investment system from the world’s second-largest economy may prove difficult.
Around 20% of the investment council’s assets are managed by external investment firms in real estate and private equity, meaning the council has no control over exactly where those funds land.
For example, according to the council’s 2022 annual report, about $250 million of the investment council’s dollars are held in Blackstone Real Estate Partners Asia, a vehicle offered by the global investment giant in Asian real estate markets.
The exact spread of this specific real estate investment — the portion of taxpayer dollars in friendly markets like South Korea or Japan, as well as investments in the Chinese real estate market — is unclear, since records regarding the specific uses of investment council dollars by external managers like Blackstone are strictly protected under the “trade secrets” public records exceptions in state law.
Late last year, Noem told the Associated Press that about 0.7% of the total investment fund, or about $130 million, is invested directly into China through Blackstone and a handful of other real estate and private equity-based external managers.
Further complicating this proposed decoupling is state law.
The investment council appears to be barred from political or social investment decisions, as the body is instructed to “invest member trust funds in a manner that is solely designed to provide for the exclusive benefit of the members and benefit recipients of the system.
ADVERTISEMENT
The council could potentially meet this bar by citing fiscal concerns about the Chinese economy or the potential for the fallout from an invasion of Taiwan, though those specific concerns have not made it into this round of open letters from Noem.
State Investment Director Matt Clark directed questions from Forum News Service regarding whether a decoupling from China was a sound fiscal decision, and how it could be completed legally, to the governor’s office.
In a response to a similar set of questions, the governor’s office pointed back to the investment council as the best entity to offer answers.
Public statements from Clark indicate his focus has long remained on the state’s bottom line.
“The only color we see is green,” Clark told the South Dakota Legislature’s Executive Board about his aversion to Environmental Social Governance investing strategies, or ESG, during a May 19 hearing unrelated to Noem’s recent announcements.
Jason Harward is a Report for America corps reporter who writes about state politics in South Dakota. Contact him at 605-301-0496 or jharward@forumcomm.com.
The Trust Project
