Aim: Growth by investing in the equities of companies involved in the development, manufacture or sales of goods or services to consumers in Greater China
Minimum investment: Lump sum £1,500
Investment split: 100% in equities in Greater China
Isa eligible: Yes
Charges: Initial 3.5%, annual 1.5%
Commission: Initial 3%, renewal 0.5%
Tel: 0800 028 4489
Fidelity Worldwide Investment has launched an onshore mirror fund of its Luxemburg-based China consumer fund. Fidelity says the fund differs from most other China focused funds as provides pure exposure to China’s developing consumption market.
Fund manager Raymond Ma believes the big winners of the consumer trend in China will be local companies producing local products specifically tailored to Chinese needs. To benefit from this, Ma will typically invest in the equities of 80-120 Chinese companies that are largely unknown in Europe.
Discussing the potential opportunities open to this fund, Flowers McEwan director David Flowers says: “Fidelity has spotted a future source of profitable income from the spread of the disease of consumerism from the West into the Coastal regions of China and rapidly onward into the central and western hinterland.
“There are 1.3bn people in China who, on the back of steady and sometimes spectacular growth, are now increasingly able to spend their earnings not on the essentials of life but on the non-essentials, or luxuries.”
Flowers points out that the spread of consumerism and spending on luxuries generates great opportunities for new business – much being generated within China itself.
“The 10 richest businessmen have made their money from selling to their compatriots, not to foreigners. So Fidelity, with a strong Chinese track record behind it, has launched a fund aimed unashamedly at this burgeoning class of consumers,” says Flowers.
He believes that as an alternative to the tired and unconvincing investment stories in the US and Europe, this could provide an enticing fund to present to investors.
Discussing the charges, Flowers regards the 3.5 per cent initial charge as competitive. He adds that this charge will apply unless you buy direct and on-line, in which case there is no initial charge. “This means that IFAs should really direct their clients to surf the net to buy this in order for them to get the best deal – but then we would lose our 3 per cent commission,” he says.
Flowers sees the 1.5 per cent annual management charge as average and points out that this charge covers a 0.5 per cent fund-based trailer to the IFA. “Nevertheless, the reduction in yield means that this fund will have to earn in excess of 6 per cent a year just to keep pace with cash and bond investments,” he says.
Turning to the less attractive aspects of the fund, Flowers says: “The flashing red warning light for any fund investing in the Far East is corporate governance. Raymond Ma, an analyst and manager of long standing in these areas, is keen to point out that he is fully aware of this threat and that he manages the fund in such a way as to minimise the risk.”
Flowers adds that Ma works at minimising the risk by only buying the very biggest firms, where the risk of desperation in raising cash is low, and in watching the metrics that are most sensitive to fraud – such as cashflow.
Identifying products that could provide competition to the fund, Flowers says the story behind Fidelity’s other China funds is quite good, but points out that these are not targeted directly at the consumer market. “The two most attractive alternatives are the First State Greater China growth fund, which has shown the highest return in the sector over five years at 117 per cent and the Franklin Templeton China fund, which also has a good track record.”
However, Flower observes that both these funds are even more expensive than the Fidelity funds, so he feels they will have to work that much harder to justify their existence.
Summing up, Flowers says: “At a time when most of the news is gloomy, this is an appealing story but not without its risks.
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average