Investment sentiment toward China appears to be picking up. Inflows into China equities, on and offshore year-to-date, have been about $10bn, according to estimates from Goldman Sachs. This is mainly due to cheap valuations and improved sentiment after the crash last summer.
Data provider EPFR Global noted the largest weekly capital influx into Hong Kong and China equity markets since June 2015 for the week ending August 17, which totaled around $990m.
However, the IMF recently issued a stark warning about China’s reform progress and concerns persist over the possibility of credit defaults and the devaluation of the yuan.
Against this backdrop, Dai Jingxia, analyst at Morningstar China, provides a comparative analysis of two southbound funds authorised for sale under the Mutual Recognition of Funds scheme.
Investment Strategy
Both funds have been approved for the MRF but haven’t yet started sales in the SAR.
It is worthwhile to note that the asset management firms behind both of the products have foreign partners.
The Beijing-based firm Harvest Fund Management was set up in 1999 with state-owned China Credit Trust holding a 40% stake and Deutsche Asset Management and Lixin Investment each owning a 30% stake.
Harvest is ranked the sixth largest mutual fund house as of June 30 in terms of assets under management totalling about RMB 300bn ($45bn).
ABC-CA Fund Management is a joint-venture between Agricultural Bank of China, the world’s third largest bank as of 2015, and Crédit Agricole’s Amundi Asset Management and state-owned Chinalco Capital.
As of June 30, it had roughly RMB 80bn of assets under management in China, putting it at 28th place among mainland fund houses.
The two firm’s funds fall into Morningstar’s “aggressive allocation” category, with equity-type investments consisting of about 80% of net assets most of the time, Dai said.
The ABC-CA fund is among the 22 onshore MRF funds recommended by Morningstar in the China Best Ideas List report released in April.
Top-down style
The Harvest fund aims to capture the long-term growth potential of companies with the aim of achieving stable capital appreciation.
It tends to use a top-down approach by first focusing on industries that are expected to grow and then moving down a level to individual stocks, which are evaluated for strong management teams and high growth potential, she said.
Thus, the average holding period is mid- to long-term.
“Meanwhile, when the markets are more cautious, this fund focuses more on GARP (Growth At A Reasonable Price), weighing financial results and valuation. If markets turn more bullish, the fund manager would prefer investing in companies that are at the beginning stage of growth.”
By comparison, the ABC-CA fund targets consumption-related stocks and seeks higher-than-benchmark returns while keeping strict risk control, Dai said.
However, the approach is similar to Harvest. The manager first picks industries seeing accelerating growth and then selects individual stocks within those industries that are expected to have significant earnings.
“The fund manager’s allocation leans on emerging industries in order to capture the growth at the early stage of development.”
Its turnover rate is thus higher than average, reaching 575% last year, she noted, and much greater than the Harvest fund’s rate of 187%.
“ABC-CA fund is more proactive in terms of capturing short-term market opportunities, while the Harvest’s favours coompanies with mid- to long-term value.”
Sector weightings: (as of 2015-end)
| Harvest fund | % | ABC-CA fund | % |
| Consumer discretionary | 26.56 | Technology | 34.13 |
| Technology | 26.33 | Consumer discretionary | 32.85 |
| Consumer staples | 15.95 | Industrials | 12.72 |
| Industrials | 13.31 | Materials | 7.82 |
| Healthcare | 12.39 | Financials | 5.59 |
| Materials | 2.13 | Healthcare | 3.36 |
| Financials | 1.69 | Consumer staples | 3.08 |
| Energy | 1.11 | Energy | 1.79 |
| Telecom services | 0.54 | Utilities | 0.95 |
| Total | 100 | Total | 100 |
Source: Morningstar
Performance
Harvest’s current manager has only two years of fund management experience, which does not reflect the management of a fund through a complete market cycle, Dai said.
However, by comparing the past performance of all the funds run by each of the two managers, “ABC CA’s portfolio manager recorded a better return, but it also came with higher volatility”, she added.
The Harvest and ABC-CA fund registered returns of -2.45% and -8.38% respectively, between 10 April 2015 and 31 July 2016.
The former saw standard deviation, a measure of volatility, reach 30.57 for the three years ended July 31, versus ABC-CA’s 37.56. The average volatility for Morningstar’s aggressive allocation funds during the period was 33.71.
