Equity funds that invest in Chinese companies offer investors exposure to a large and rapidly growing economy. In this article we compare two prominent funds in this space; the Goldman Sachs China Opportunity Equity Portfolio and the JPM China Fund. Both funds are benchmarked against the MSCI China index, which includes companies listed in China and Chinese companies listed in Hong Kong and in the US.
Goldman Sachs China Opportunity Equity Portfolio (Acc, USD, ISIN: LU0404923640)
The Goldman Sachs China Opportunity Equity Portfolio invests in China A-shares, Hong Kong-listed Chinese companies, and New York-listed Chinese companies.
Team and Process
The fund, which is still relatively small, with AUM of $33.62 million, was founded in 2009. It is currently managed by Shao-Ping Guan, though a large team based around the globe contributes to managing the fund.
Stocks are selected using a bottom up approach, though the process is described as style agnostic. The fund typically holds between 30 and 50 stocks versus its benchmark index which includes 410 stocks.
The fund’s investment universe is narrowed down to around 400 stocks by analysts, and the portfolio is then selected from these stocks by the lead manager, following discussions with analysts. The team aims to maintain a balanced portfolio of pro and counter-cyclical stocks to reduce volatility over time. Positions are sized according to the strength of conviction, as well as each stock’s contribution to portfolio risk. Emphasis is placed on executing sell discipline when valuation gaps narrow, when the investment thesis changes, or when better ideas arise.
Portfolio and Performance
As of June 2019, the fund’s top sector weighting was its 29% invested in financial services, followed by IT stocks and consumer discretionary. Most of the sector weights are broadly in line with the MSCI China index. Overweight sectors included IT stocks, energy, commodity and financial services.
The largest holdings as of June 2019 were in Tencent and Alibaba at 9.41 and 9.45% respectively. 10 stocks account for 47.9% of the fund, which is in line with the index, though the index includes more constituents.
When compared to the benchmark index the fund holds noticeably smaller companies, that trade on slightly higher forward price earnings and price to book ratios.
The GS fund returned 9.47% p.a. for the last 5 years. That is 0.92% behind the index.
JP Morgan China A Fund (Acc, USD, ISIN: LU0210526637)
JP Morgan’s China fund was launched in 2005 and is considerably larger, with over $1.25 billion under management. It invests in stocks of companies deemed to be “red chips”.
Team and Process
The fund is co-managed by Howard Wang and Rebecca Jiang. The team describes its approach as growth oriented, with a focus on higher quality companies. The fund is managed using a best ideas approach, using comprehensive research and a bottom up stock selection process.
The Asian research team, which includes China, is large and conducts extensive ‘on the ground’ research, including 1,600 company meetings annually.
The process begins with fundamental research of 450 companies in Asia, of which 170 are A shares. Research outputs include strategic classification, a risk profile analysis and a 5-year expected return. Ideas are generated by using quantitative ranking tables along with qualitative assessments. The portfolio is constructed by combining conviction, liquidity and risk management factors.
Portfolio and Performance
As of June 2019, the fund holds 78 counters, with a mean 12-month forward multiple of 14.5, and an average annual expected EPS growth rate of 15.9% – both higher than the benchmark.
The fund’s largest overweight positions were in IT, consumer discretionary, real estate and healthcare stocks. The largest positions also were in Tencent and Alibaba with 9.98% and 9.97%. 5 years performance is 10.68% p.a. what is 0.29 above the index.
Both, Goldman Sachs China Opportunity and JP Morgan China Fund, have been in the top quartile for China funds for over 3 years. At 13.87% and 12.99% they exceeded the sector average by 2.97% and 2.09% respectively.
2018 was a very bad year for both funds with losses of 17.74 and 19.30%. However, both funds compensated large parts of these losses in 2019. The GS Fund has gained 12.4% since the beginning of the year, JP Morgan gained 15.8%.
With running costs of 1.90 and 1.82% respectively, both funds are also on par. The main difference between the two strategies lies in their different sector weightings. While the Goldman Sachs Fund is increasingly focusing on financial services, JP Morgan is overweight in technology stocks, consumer stocks and healthcare.
If past performance continues, both funds should be able to provide exposure to Chinese companies with slightly lower risk than the index. The Goldman Sachs fund should offer investors lower volatility, while the JP Morgan fund may offer more growth, though that could come at the expense of higher volatility.