The last year has been extremely difficult for all investors and Chinese equity managers have not been immune from this. Inflationary concerns in the Chinese economy and macroeconomic issues such as the lack of political leadership in the developed world, social unrest in Middle-Eastern countries and natural disasters were amongst some of the most significant drivers of volatility in global markets. Active managers have been considerably impacted by these events and 2011 saw two of the most recognized benchmarks in the region, the MSCI AC Golden Dragon and MSCI Zhong Hua indices, ranked 16th and 12th percentile within the IMA China/Greater China sector. To put this into perspective, in 2008--arguably an equally difficult year--the benchmarks ended up in the 33rd and 52nd percentile, respectively.
It remains to be seen whether the government in China has taken the necessary fiscal and monetary measures needed to tackle rising prices in order to avoid a “hard landing”. There is considerable disagreement amongst commentators over the scale of the near term slowdown but the consensus indicates that, while the economy will continue to decelerate in the early part of the year, more accommodative policies in the months ahead will generate a rebound and an economic “soft landing”. The main risk to forecasts is that policy action by the authorities is delayed and, as it only acts with a lag, a more serious downturn unfolds as house prices continue to decline, export growth loses momentum and sluggish demand induces inventory destocking.
We highlight the following OBSR-rated funds which have shown consistency in their approach and a notable ability to navigate through highly volatile markets. In the onshore sector, the AAA- (OBSR) and Gold (Morningstar)- rated First State Greater China Growth fund (Premium: Morningstar research report) offers exposure to an all-cap portfolio of high-quality companies while Jupiter China offers investors exposure to a portfolio with a bias towards mid- and small-cap stocks in China and Hong Kong. The A-rated Henderson China Opportunities fund offers exposure to a blend of businesses within the Greater China universe with bias towards large-cap companies. In the offshore space, Franklin Templeton's Templeton China fund builds a portfolio of businesses across the market-cap spectrum managed by a well-resourced team under the direction of Mark Mobius.
The First State Greater China Growth fund has been managed by experienced investor Martin Lau since 2003. He is assisted by Ho Hsiu Mei. The portfolio is managed in line with the group’s Asian and emerging markets investment ethos and process, which seeks well-managed companies with sustainable business models, predictable growth and low valuations. Lau believes that having strict buy/sell criteria, a focus on earnings, finding the right management are all important disciplines when investing in China. Whilst the funds may lag during strong momentum rallies, over time they have steered a steady course across a wide range of market environments and have typically offered good downside protection in market downturns. We like the fact that the manager has shown a remarkable ability to invest in companies with sustainable earnings.
Jupiter China offers investors a portfolio of equities exposed to China and Hong Kong. Highly experienced portfolio manager Philip Ehrmann runs the funds from London using a growth-oriented style that is driven very much by bottom-up stock selection. The consistently applied approach is not benchmark focused, and the portfolios are essentially all-cap with a bias towards mid- and small-cap stocks as this is where the manager finds the most attractive long-term investment opportunities. From a performance perspective the manager aims to deliver absolute returns over the long term, and consequently returns are likely to differ significantly from that of the index from time to time, as was the case during 2011 when higher levels of risk aversion proved unfavourable for small- and mid-cap stocks.
Henderson China Opportunities offers investors exposure to a diversified portfolio of equities in Greater China. London-based manager Charlie Awdry runs the fund actively within a disciplined and benchmark-focused risk management framework. The fund has participated well in the long-term structural growth themes that are evolving in the Greater China region and the manager remains a passionate advocate of the asset class. The manager’s focus on the benchmark and the need to outperform it results in a bias to large caps as investment in smaller cap stocks often add too much tracking error and their illiquidity renders them less attractive to the manager. The portfolio is generally constructed between 40 to 70 stocks and we like the manager’s solid emphasis on the potential downside loss of an investment and the risks to the sustainability of earnings and growth.
The Franklin Templeton Templeton China fund benefits from a consistent approach and is managed by an experienced and stable emerging markets management team. Seasoned investor Eddie Chow has been closely involved in the management of this strategy since he joined Templeton in 1994. The team seeks to identify growth stocks that are trading at significant discounts, which often implies being contrarian and patient. The portfolio typically holds between 80 to 90 names and positioning is predominantly driven by company specific opportunities. The team believes that security selection is the main source of alpha generation so the portfolio can differ quite significantly from its benchmark.This article was originally published on Morningstar under the title: Funds for Navigating China's Choppy Waters
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