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High conviction China fund aimed at long term

In Xingtai Capital’s highly concentrated China fund, the top ten account for 60% of the portfolio, which holds only 20-30 positions.
Michelle Leung, Xingtai Capital

Founded in 2013, Xingtai Capital manages a long-only fund that focuses on China’s consumer markets.

Unlike most mutual fund products in the market, the Xingtai China Fund combines the expertise of managers having experience in both the private and public equity markets, Michelle Leung, Hong Kong-based CEO of Xingtai, told FSA in a recent interview.

Leung, who co-manages the fund, was previously a partner at Lunar Capital, a private equity firm that focused on Chinese consumer brands.

The other co-manager is Shanghai-based Cao Bingchao, whose background is in the public equity space. Previously, he was a senior portfolio manager for a Greater China-focused portfolio at Lombard Odier.

“Our strategy is a combination of our experiences,” Leung said.

Both Leung and Cao look at consumer-focused Chinese growth companies that are listed in both the onshore and offshore markets. Although these are growth companies, the duo, together with three Shanghai-based analysts, only invest in companies that have attractive valuations.

“Our strategy is to invest in stocks that have a value dislocation”, usually because they have been misunderstood by the market, she said.

Some companies, for example, have 30% earnings growth but the stock is only valued at 10 times on a price-to-earnings ratio basis. “In some cases, the companies are small- or mid-caps, so not a lot of people are looking at the stock.”

Highly concentrated portfolio

The firm’s China fund, which is only available to professional investors, is concentrated, with 20-30 stocks in the portfolio – a majority of which are in the mid-cap space, according to Leung.

The top five stocks account for 40% of the fund, while the top 10 stocks make up 60%, she added.

Given that the product is concentrated, the team takes an “extra mile” with its analysis to further confirm stock picks, according to Leung.

“When we get to the final stage of selecting what goes into the portfolio, we tend to do our own channel checks to verify what management is telling us,” she said.

“For example, if we think there is an issue with competition for a particular product, we will go through different distributors, such as stores or shops, and see if the product is positioned the way it was suggested to us by management.”

As an ex-private equity investor, Leung said that she likes to have frequent meetings with the companies the fund invests in.

“For the companies that are in our portfolio, we talk to them every month, and it can be a call or a face-to-face meeting.

“We are pretty diligent about that, because in China, things can change quickly. We can also stay ahead of any unforeseen announcements or anything the market might be surprised with.”

Volatile 2018

Volatility has always been a challenge in Chinese equities, Leung said.

“In the last four years, it has been extremely volatile. Sticking to the strategy and not deviating from it is challenging as not doing any kind of strategy shift is critical,” she said, noting that the fund has a long-term investment horizon of at least three years.

Leung claimed that the team did not make any huge changes in the portfolio even in 2018. According to her, while the MSCI China Index was down by around 20% last year, the fund was in positive territory, though she didn’t provide a performance  chart.

Most of the performance attribution came from three stocks, which had been in the portfolio 18-24 months prior to 2018, she explained. Leung declined to name those stocks, however.

“They were very cheap when we got them, but their potential was only realised in 2018,” she said.

According to Bloomberg data, year-to-date, the fund has returned 30.11%, which compares to the 6.84% performance of the MSCI China Index.

Part of the Mark Allen Group.