Active funds investing solely in Chinese equities have delivered solid returns over the last 12 months to 30 September, 2017, according to FE Analytics.
The characteristics of the Chinese index are expected to provide actively managed funds with a tailwind to outperform, Zenith’s senior investment analyst, Quan Nguyen, says.
According to FE Analytics’ data, the two active funds that invest solely in Chinese equities, Premium China Fund and Fidelity China Fund, returned, respectively, 14.88 per cent and 20.14 per cent over five years to 30, September, 2017, and 12.34 per cent and 20.07 per cent over three years.
However, over the last 12 months to 30 September, Premium China Fund saw an annualised return at 27.55 per cent with Fidelity’s China Fund returning 23.76.
At the same time, BlackRock iShares China Large-Cap Fund ETF (exchange-traded fund), which is benchmarked to FTSE China 50 index, delivered results of 11.21 per cent and 13.32 per cent for the three and five-year periods, respectively while FTSE China 50 index returned 16.73 per cent and 12.35 percent, respectively, the data found.
Nguyen stressed that the Chinese market was still relatively inefficient and lacked professional coverage which, on the other hand, provided additional scope for investors to uncover and exploit mispricing in the market.
He explained that a material number of shares that comprise the Chinese index were suspended and these suspensions were due to the triggering of circuit breakers, mechanisms that regulatory authorities in China have imposed to halt trading after material share price declines.
“The stocks that typically trigger such circuit breakers tend to be of lower quality,” he said.
“Passive index funds by default will have exposure to such positions, which may be to the detriment of performance. In addition, once held, the passive funds are unable to exit such positions, potentially causing performance drag in strongly rising markets, such as the past 12 months.
“Actively managed funds on the other hand, tend to ascribe to quality oriented investment processes which seek to avoid lower quality stocks. “
“Through a full market cycle, it is expected that the above characteristics of the Chinese index should provide actively managed funds with a tailwind to outperform.”
Premium China Funds Management’s head of distribution and chief investment specialist, Jonathan Wu, said that the past 12 months (to the end of September) were interesting as from late Q3 to Q4 a lot of his fund’s value stocks finally came through leading to a strong rally for the fund.
According to Wu, the main sectors that did benefit from that were real estate, healthcare and utilities.
“Since then, we have rotated a big chunk of the portfolio out due to the abovementioned rally when many of the stocks hit our valuation targets.
“The sectors we have now rotated more into are banks and insurance which did not feature much at all 12 months ago,” he said.
Wu noted that the fund had a much stronger value bias which allowed it to exploit market inefficiencies. “This may lead us to underperform sometimes and it can last for two or more years, but we have to stick to our convictions as our long term track record and proof shows that value does outperform growth.”
On the other hand, according to Fidelity China Fund’s investment director, Catherine Yeung, the search for value-driven opportunities should not be restricted to sectors that were traditionally associated with value investing, such as utilities and defensives, according to a statement delivered to Money Management.
“The fund remained focused on opportunities arising from the long-term structural changes underway in China,” she said.
As at the end of August 2017, financials and energy were the fund’s key sector overweight holdings followed by industrials and materials. The fund also retained its significant underweight towards the IT sector, with internet-led businesses being an area of conservative exposure.
At the same time, Russel Chesler, VanEck’s director, investments and portfolio strategy, stressed that the VanEck Vectors ChinaAMC (CETF), which tracks the CSI300 Index for mainland China A-shares including the largest 300 listed Chinese companies, was the only retail fund in Australia that invested only in China A-shares.
“The recent closure of the AMP Listed China Fund illustrates the difficulty managers have investing in mainland A-shares,” he said.
He explained that many of the competitors invested in H-shares or had only limited exposure to A-shares. Additionally, in the past China A-shares and China H-shares performed differently, he noted, with H shares, red chips and other listings outside China not covering the full range of Chinese equities and therefore they were not comparable to VanEck’s exchange-traded fund (ETF).
“Our ETF does not aim to outperform any index. It aims to track the returns of the index. Our holdings are fully transparent and our ETF offers investors a simple way to access, difficult to obtain, A-shares on ASX,” he said.
“Many of the other competitors aim to beat the other China equities indices such as the MSCI China Index, which contains a mix of the different types of Chinese equities and charge significantly higher fees.”
CETF delivered a total return of 17.58 per cent, 22.23 per cent and 11.77 per cent over five, three and one-year period to 31 August, 2017, respectively.
At the same time, its benchmark, CSI300 Index, returned 19.36 per cent, 23.78 per cent and 12.35 per cent, respectively.
