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Sector focus: Will this year bring good fortune for investors?

After a mixed 2018, Chinese equity funds have got off to a strong start in 2019

Last year, headlines were dominated by escalating fears of a trade war between China and the US. Each country is disputing tariffs placed on goods traded between one another, while the US president has been complaining about China’s trading practices for many years. In December 2018, the two countries suspended the new tariffs each had imposed for 90 days for both sides to renegotiate.

Alongside this, China did not escape the market sell-off seen across Europe and the US, but showed it was more resilient than others.

Official Chinese statistics state the economy grew by 6.4 per cent in January to March on a year earlier, although many read the official figures with slight uncertainty.

The Greater China area also includes Taiwan and Hong Kong. Taiwan’s growth forecast for 2019 is currently at 2.15 per cent, while Hong Kong’s sits at 2.9 per cent. While there are still dominant tensions between the three states, many stocks are treated under the “China” umbrella.

Flow data
According to the latest figures available from the Investment Association, the China/Greater China sector is stagnant when it comes to net retail sales. The February data set – the latest available – shows the sector saw £12m in fund flows, but the previous 12 months had not seen any major jumps in flows in or out of funds.

Net retail sales vary from £23m in outflows in June 2018 to £23m in inflows in February 2018. By comparison, the Global sector saw the most inflows, reaching £513m in one month alone.

The IA specifies funds in the China/Greater China sector should invest at least 80 per cent of their assets directly or indirectly in equities of the People’s Republic of China, Hong Kong or Taiwan. At any given time, funds may invest in one or more of the three countries covered.

So far this year, China funds tend to be dominating the performance table. The top-performing fund of the first quarter of this year was the GAM Star China Equity fund, managed by Michael Lai, which saw 23.97 per cent returns in Q1 alone. Of 3,893 funds with available data for the time period, seven China funds were in the 20 top-performing ones over the first three months of the year.

The sector, on average, is the best-performing, seeing 15 per cent returns for the average fund, followed by the IA Technology and Telecommunications sector, which saw the average fund return 14.2 per cent.

Next 12 months
The year ahead marks many challenges for the China region, mainly centred around the trade talks. The deadline for negotiations has been extended but analysts are predicting the US will continue to challenge China on its current tariffs.

With the US presidential elections coming up next year, it is possible the government could drag out talks to save face.

Manager of the Nomura Global Dynamic Bond fund Dickie Hodges recently said: “President Trump’s interests in a second term are best served by the perception that he is talking tough on China, while continuing to avoid tariffs that severely damage trade, and therefore the economy and his voters’ wealth. In other words: if the talks drag on, that suits the president.”

This year marks the Year of the Pig in Chinese culture, and the animal is meant to symbolise wealth and good fortune.

However, the last Year of the Pig fell in 2007 and what followed certainly did not symbolise good fortune or wealth for many.

Funds in focus: Steady returns amid global tensions

The region has rebounded since 2018’s late market sell-off, but how have funds fared in recent years? Here is a look at the five top- performing funds over the past five years.

Neuberger Berman China Equity

  • Performance over 5 years: 160.09%
  • Fund size: $940.5m (£730.4m)
  • Manager: Frank Yao
  • Launch date: July 2009
  • Benchmark: MSCI China
  • Top 5 holdings:
    Alibaba Group Holding 9.7%
    Tencent Holdings Ltd 9.3%
    China Construction Bank 7.3%
    Yili Group 4.7%
    Zto Express 3.7%
  • About: This fund’s process uses a combination of growth and income investing in China, Hong Kong, Macau and Taiwan. The manager uses intensive research to identify opportunities, as well as having a top-down look at the wider economic issues that could affect investments. With an annualised performance of 21.07 per cent over five years, the fund has more than doubled returns in that period, making it the best-performing fund over the timeframe.

Fidelity China Focus

  • Performance over 5 years: 140.54%
  • Fund size: $5,117m
  • Manager: Jing Ning
  • Launch date: October 2009
  • Benchmark: MSCI China Capped 10%
  • Top 5 holdings:
    China Construction Bank 6.3%
    China Mobile 6.1%
    Tencent 5.9%
    Alibaba 5.7%
    China Life Insurance Co 4.9%
  • About: Like many funds, this vehicle aims to provide long-term capital growth, but the level of income is expected to be low. This fund invests its net assets directly in China A and B shares. It can invest directly in assets or can achieve exposure to China indirectly through other eligible means, including derivatives. The manager has a bottom-up approach and she focuses on determining the intrinsic value of a company, rather than wider themes.

GAM Multistock China Evolution Equity

  • Performance over 5 years: 135.64%
  • Fund size: $69.8m
  • Manager: Jian Shi Cortesi
  • Launch date: December 2013
  • Benchmark: MSCI China
  • Top 5 holdings:
    Tencent 9.9%
    Alibaba 9.5%
    China Mobile 5.5%
    China Resources Land 4.5%
    China Citic Bank Corp 4.0%
  • About: This fund’s primary aim is to capture evolving growth opportunities in the Chinese market, as its name suggests. Based on a bottom-up stock selection strategy, the manager also uses in-depth company analysis and applies a top-down approach to take into consideration any sector attractiveness and any broader macro themes.

Matthews China Dividend

  • Performance over 5 years: 131.13%
  • Fund size: $16.5m
  • Managers: Sherwood Zhang and Yu Zhang
  • Launch date: January 2013
  • Benchmark: MSCI China
  • Top 5 holdings:
    Tencent Holdings 5.0%
    China Merchants Bank 3.1%
    Citic Telecom International 3.0%
    China Mobile 2.9%
    Hong Kong Broadband Network 2.7%
  • About: The China Dividend fund looks to achieve total return, with an emphasis on providing current income. It invests largely in small-cap equities (43.9 per cent of the fund) and favours consumer discretionary stocks and communication services. It seeks to provide a level of current income that is higher than the yield generally available in Chinese equity markets over the long term.

Baillie Gifford Greater China

  • Performance over 5 years: 125.52%
  • Fund size: £117.5m
  • Managers: Mike Gush, Sophie Earnshaw and Richard Sneller
  • Launch date: November 2008
  • Benchmark: MSCI Golden Dragon Index
  • Top 5 holdings:
    Alibaba 9.9%
    Tencent 9.7%
    TSMC 8.5%
    Ping An Insurance 5.4%
    AIA 4.7%
  • About: Investing on a long-term perspective of five years, this vehicle has a strong preference for growth and looks for significant upside in each fund it invests in. It applies a rigorous bottom-up analysis, undertaken by the management team. The portfolio typically holds between 40 and 100 stocks, and features all countries covered by the Greater China umbrella.

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