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China funds: How good are the managers in the bear market?

China funds in 3 year comparison

Greater China is currently one of the most interesting stock markets in the world. The shares of mainland Chinese stock exchanges are increasingly being integrated into international stock indices. More money is flowing into China’s capital markets, but the trade conflict between the USA and China is depressing both stock market mood and prices. Actively managed China funds promise the best of both worlds in such scenarios.

On the one hand, high returns can be achieved through market know-how. On the other hand, the fund company promises protection for capital in the event of price slumps. Following the recent correction in Chinese equities, it is worth taking a look at various Chinese funds. We looked at three products from Franklin Templeton, Fidelity and J.P. Morgan. How did the funds of the three US companies perform? Are the managers worth their money?

Invest in Greater China

Greater China refers to the entire Chinese economic area, the so-called Greater China. Greater China comprises the People’s Republic of China, Hong Kong and Taiwan. Taiwan and Hong Kong are among the most important economic centres in Asia. Hong Kong, for example, is one of the most liquid financial centres in the world. Chinese B-shares and Hong Kong H-shares were open to foreign institutional investors from the outset.

In contrast, mainland stock markets have been dominated by Chinese private investors known for short-term trading. In the past, this often led to high volatility. Investors can therefore increasingly benefit from the opening of the Chinese capital market to foreigners.

China funds and ETF need to invest more in China

At the beginning of June 2018, the index provider MSCI included more than 230 A-Share stocks in its international indices, which are traded on the Shanghai and Shenzhen stock exchanges. The continental Chinese stock market is already the second-largest in the world after the New York Stock Exchange in terms of market value and liquidity. The proportion of A-shares together with H-shares from Hong Kong in the MSCI Emerging Markets rises to one third.

The weighting of shares from China in various indices is gradually increasing, and the liberalisation of the markets by the Chinese state is continuing. These measures will allow considerable capital to flow into China. For example, index funds will have to invest heavily in the Chinese market.

What are the advantages of investing in China?

China’s enormous expenditure on research and development has made it the world’s number one high-tech location. In a few years, the country will replace the USA as the world’s largest economy. China’s uninterrupted growth is being driven by domestic consumption, and there is considerable demand for luxury goods.

Artificial intelligence and electromobility are key areas in which China wants to take a leading international position. Stricter rules on the stock markets, efforts to curb corporate debt and the growing global importance of the Chinese economy and currency are all favourable factors for investing in China.

The MSCI Golden Dragon Index covers the main spectrum of the Greater China capital market. The index contains large caps, large and medium-sized companies. It includes B- and H-shares as well as the Red Chips and P Chips classes of shares not traded on mainland Chinese stock exchanges. It is therefore well suited as a benchmark index.

China funds want to play to their strengths in the long term. Knowledge of the regional markets and experience in stock exchange trading in China through funds are very valuable for investors due to the country’s national peculiarities. In the following, our editorial team looks at three Chinese funds that are based on the benchmark of the MSCI Golden Dragon.

Three China funds in comparison

The JPMorgan Fund — Greater China Fund A (acc) — USD (ISIN: LU0210526801) has posted a solid minus of 26.6 percent since the beginning of the year. The fund is taking full advantage of the current correction in the market. The 3-year performance has also deteriorated significantly as a result of the slump, currently standing at only 3.74 percent per year. The fund’s running costs, on the other hand, are 1.9 percent per year.

The fund focuses on technology stocks, consumer goods producers and financial service providers. The fund’s strategy is to invest at least two-thirds of its assets in individual stocks domiciled or predominantly producing in Greater China. The fund currently contains 73 percent Chinese investments, with 14.6 percent coming from Taiwan and 12.4 percent from Hong Kong.

The investment fund is managed by an experienced fund manager, Howard Wang, who has been managing the fund assets since its launch in 2005. Since July 2017, the fund management team has included Rebecca Jiang. The fund volume at the end of September 2018 was just under USD 550 million.

China fund returns y-t-d
China funds in the current correction

Active selection at Fidelity

The performance of the Fidelity Fund — China Consumer Fund A-Acc-USD (ISIN: LU0594300179) has been minus 22.77 percent since the beginning of the year. Here, too, the current market correction is having a full impact on the portfolio. Over three years, the fund achieved average growth of 5.82 percent. The fund volume is considerably larger and amounted to approx. USD 2,788 million as of 31 August 2018. Investment decisions have been made by Raymond Ma since the fund’s launch in 2011. The manager selects the shares using a bottom-up approach with the help of fundamental analysis of companies.

The annual cost (TER) is comparatively high at 1.94 percent. At least 70 percent of the shares come from or operate in China or Hong Kong. The fund invests directly in A and B equities; the current investment focus is on consumer goods, financial services and technology.

Best China fund comes from Templeton

The Templeton China Fund A (acc) USD (ISIN: LU0052750758) is the oldest of the three comparison funds. The fund manager since January 2016 has been Eddie Chow. The Templeton Fund also invests in Chinese A and B equities, which must account for at least 70 percent of the fund’s assets. These are mainly technology companies, suppliers of consumer goods and financial service providers. As of 31 August 2018, the fund managed approximately USD 505 million. At that time, the fund’s assets contained 48 stocks with a P/E ratio of around 12. This sounds like a moderate valuation.

The Templeton China Fund has the highest running costs of our three funds: 2.45 percent per year. In return, Franklin Templeton achieves the best performance of the three funds. The risk-return ratio is the most advantageous — since the beginning of the year, the China fund has lost only 7.79 percent. Over three years, the annual performance was 7.66 percent. Franklin Templeton’s China fund is therefore most likely to do what it is supposed to do: achieve returns and offer downward protection.

China funds in risk-return comparison
China funds in risk-return comparison

China funds promising in the long term

The gradual opening of the Chinese capital market and the dismantling of trading restrictions open up far-reaching prospects for equity investors. Despite short-term risks, such as the trade conflict with the US or the high corporate debt ratio, China’s long-term economic outlook remains intact. Regardless of liberalization, Chinese stock markets face obstacles such as government regulations or a lack of research. It is therefore advisable for investors to invest in Greater China through a good, actively managed China fund.