Posted inAsset Class in FocusNewsResearch

A look at China equity funds in volatile markets

Equity fund managers who perform best among peers during specific China market volatility are not among the best when global markets plunge.

How do specific China equity funds perform during global market volatility (such as 2008) versus periods of domestic market volatility in China (such as 2015)?

FSA used this question to examine 85 China and Greater China equity funds available for sale to investors in Hong Kong and/or Singapore, with more than 10 years of track record, using data provided by FE Analytics.

We looked at the performance of active and passive funds in the calendar years 2008, which captures the global financial crisis, 2015, when the China A-share market went on a rollercoaster ride, and the first five months of 2018, when volatility “returned”  — both globally and in China — after a prolonged absence.

In 2008, all the China equity funds examined lost between 40% and 70%. Among this group, the funds that held up better than others also did better in the first five months of 2018 (see chart below).

However, those same funds tended to do more poorly than peer products during the volatility specific to the China market in 2015.

In particular, the top five performers in the category in 2008 placed further down the ranks in 2015 and the five that did best in 2015, tended to be some of the worst performers in 2008.

‘Best performing’ China/Greater China equity funds in 2008

2008 return 2015 return  2015 rank
Fidelity Greater China Fund -44% -3.48% 28
Value Partners Chinese Mainland Focus Fund -44.78% 1.7% 12
NN (L) Greater China Equity Fund -44.79% -3.24% 8
First State Greater China Growth Fund -45.1% -11.28% 24
Templeton China Fund -45.11% -0.47% 72

‘Best performing’ China/Greater China equity funds in 2015

2008 return 2015 return 2008 rank
HS China B-Share Focus Fund -61.16% 46.23% 79
Schroder China Equity Fund -56.02% 36.52% 66
Open Door Capital Group China Fund -56.4% 25.3% 71
UBS (Lux) Equity China Opportunity Fund -55.35% 15.95% 64
UBS (Cay) China A Opportunity Fund -47.78% 13.14% 18
Data: FE, returns in US dollars, the rank is out of 85 funds.

Referring to the chart below, China equity funds that performed better in 2015 tended to do more poorly in 2018. (While still relatively weak, the correlation in both cases was stronger when only China equity funds were considered).

This illustrates the somewhat obvious fact that the global crisis of 2008 was more similar to the global return of volatility in 2018 than either of these events were to the 2015 exuberance and subsequent crash in China’s A-share market, which was driven by retail investors.

It is notable that the negative correlation of 2015 returns with those of 2008 or 2018 was stronger when passive funds were removed from the sample. The active managers who did relatively okay in 2008 tended to do more poorly in 2015.

It is difficult to draw firm conclusion but the data suggests that active China equity fund managers tend to have skills that help them weather only one kind of market turmoil, either global or China-specific, but not both.


2008 and 2018 returns of China and Greater China equity funds

Data: FE, returns in US dollars, 2018 YTD returns as of 31 May 2018

2008 and 2015 returns of China and Greater China equity funds

Data: FE, returns in US dollars

Part of the Mark Allen Group.