China is getting renewed attention from global investment managers due to historically low market valuations and the longer-term promise of structural reforms.
Further, the mainland’s RMB Qualified Foreign Institutional Investor license pilot programme has expanded beyond Hong Kong to Singapore, the UK, Germany and South Korea, giving managers access to onshore Chinese securities.
Opening the investment door wider is the launch of the Hong Kong-Shanghai stock market connect, which will impact the Greater China region.
With this as our theme, FSA takes a look at the Invesco Greater China Equity Fund and the First State Greater China Growth Fund, both of which invest in companies that run significant operations in China, Hong Kong, and Taiwan and have long-term growth potential.
Performance Review
Germaine Share, analyst, manager research at Morningstar Asia, found both funds top performers, beating the benchmark MSCI Golden Dragon as well as peer funds.
“If we look at the performance against the benchmark and peers, they offered downside protection even in the weak markets in 2008 and 2011. They did not lose as much money as peers.”
She cited data on the First State vehicle in particular.
“When the market is falling, the fund really outperforms benchmark and its peers. It has one of the lowest downside capture ratios in the category.”
In 2011, the First State Fund posted a negative return of 10.91% while that of Invesco was negative 18.08%.
On the relative underperformance of the Invesco fund in 2011, she said:
“The Invesco fund focuses on an all-market capitalisation strategy and has more mid-cap and small-cap stocks that tend to be more volatile and susceptible to market movements.”
Investment process, strategy review
Both funds follow a bottom-up approach and are benchmark agnostic, taking active bets and having substantial deviations from the benchmark.
They are also fundamentally driven and go beyond short-term performance, but are looking at different things.
“First State is more of a quality-oriented strategy and Invesco is more value investing.
“First State focuses a lot more on management quality, such as management track record and corporate governance.”
In regards to the Invesco fund, the manager looks at sustainable value.
“He is really looking at stocks that are cheap, trading below the fair value, but have a catalyst for potential earnings growth.”
First State has a longer investment horizon in equities of about three-five years. For Invesco, it’s two-three years, though that is still a long-term investment, said Share.
She noted that the First State fund is overweight consumer staples and utilities compared to the benchmark. Invesco also has heavy weighting in consumer discretionary and consumer staple companies. Both funds are very underweight in the financial sector.
At the end of August, the First State product had invested 13.2% of its assets in the consumer staples sector compared to the benchmark index weighting of 3.1%. Likewise, the Invesco fund has 8.3% allocation to the consumer staples companies.
Information technology was the top sector allocation for both funds, with First State deploying 26.6% of the assets to the sector while Invesco had 34.2% weighting.
Invesco’s top holdings feature Taiwanese technology companies such as Hon Hai Precision Industry, Mediatek, Taiwan Semiconductor, Baidu ADR, and Dongfeng Motor.
The top stock picks of First State were China Oilfield Services, Taiwan Semiconductor, Cheung Kong Holdings, Delta Electronics, and ENN Energy Holdings.
Portfolio Managers
Martin Lau has been managing the First State fund since 2002 while Mike Shiao has been managing the Invesco fund since January 2008.
Morningstar likes both the managers for their track records and experience, but the First State fund has an edge in this area due to its stable and much larger team.
Lau, who has 19 years of experience, also manages a range of other products such as the First State Hong Kong Growth fund, the First State China Growth fund, and the First State Asian Equity Plus fund. He is supported by a very sizeable and stable team comprising 17 Asia Pacific ex-Japan analysts.
“All these funds have outperformed tremendously over past few years.”
Shiao, with 21 years of experience, also manages a range of Greater China products such as the Invesco China Focus Fund and the Invesco Perpetual Hong Kong and China Fund.
“Again, the track record for these funds has been very good under his management. He is supported by a smaller three-member analyst team, who are relatively new to the firm.”
Fees
Both the funds charge a 5% initial charge and annual management charge of 1.5% per annum.
According to Morningstar Direct, the ongoing charge or the total expense ratio for the First State fund is 1.59% as of 17 February and 2.03% for the Invesco fund as of 19 February.
The category median for Greater China equity funds is around 2.06%, so the First State fund’s fees are considered low while Invesco’s are considered average, she said.
“The low fees on the First State fund definitely give it another competitive edge.”
The Verdict
Share finds both funds outperformers over the longer-term.
“If you are looking for exposure to more small- and mid-caps, then the Invesco fund makes sense.”
“But, if you really value downside protection and are looking for a fund that would not lose much in a bear market compared to peers, then I would say go for the First State fund.”
