Asymmetry of risk and returns among China funds

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Returns seem to be a better guide than volatility when it comes to selecting a risk-adjusted China equity fund.

Investors are usually advised to consider the risk-adjusted performance of funds, and avoid the seductive attractions of out-sized returns. However, they can amount to the same thing, not least among China equity funds, where typically there is solidity beneath the patina of star-quality performance.

The four top performing China equity funds over three years, out of 109 available to Hong Kong and/or Singapore retail investors, also have the best risk-adjusted returns, as measured by the Sharpe ratio. These are the UBS Equity Opportunity, HS China Equity, Aberdeen Standard China A Share Equity and Investec All China Equity funds, according to FE Analytics data.

Moreover, the seven funds with the best three-year cumulative performances are also among the 10 funds with the best Sharpe ratios.

Conversely, the worse the returns, the worse tend to be the Sharpe ratios. Bottom of the pile for both three-year performance and risk-adjusted returns is the Shenyin Wanguo RQFII A Share Strategy, which has posted a negative 19.09% return over the period. It failed to prosper during the 2017 China equity market rally, yet provided no protection during the 2018 stock price collapse.

It is difficult to account for the contrasting performances from snapshots of their current portfolios. However, the better performing funds seem to have greater exposure to sectors with growth potential, such as technology and communications; the worst performing have bigger weights to defensive sectors, including banks.

Yet, the best performers do share a similar characteristic to the worst performers: their volatility tends to above the sector average in a notoriously volatile market. The MSCI China index has three-year annualised volatility of 19.88%, compared with the MSCI World (11.44%), S&P 500 (12.93%) and MSCI Emerging Markets (14.87%) indices.

Finally, although the sector median ongoing charges figure (OCF) is a quite racy 1.98%, the Shenyin Wanguo should find it hard to justify its 3.45% OCF to investors who have suffered from such poor performance. The only fund that charges a higher annual fee is a China Policy Focus Fund – also managed by Shenyin Wanguo.


Comparative data for China equity funds

Fund

Sharpe ratio

3-year cumulative returnAnnualised returnAnnualised volatility

OCF

UBS Equity Opportunity

0.94

86.00%21.75%19.36%

2.40%

Aberdeen Standard China A Share Equity

0.88

77.66%20.07%18.76%

1.98%

HS China Equity

0.85

81.44%20.95%20.44%

?

MSCI China

0.53

53.82%14.07%19.88%

Sector Average*

0.29

29.57%8.41%17.00%

1.98%

BOCHK China Golden Dragon

-0.01

-9.59%-3.27%15.12%

1.65%

BOCHK All Weather CNY Equity

-0.02

-16.63%-6.05%20.20%

2.28%

Shenyin Wanguo RQFII A Share Strategy

-0.02

-19.09%-7.03%19.63%

3.45%

Source: FE Analytics. Data in US dollars for 17 June 2016 – 19 June 2019.
* Median for active fund strategies only

Comparative performance of China equity funds vs MSCI China Index and sector average

Source: FE Analytics. Three-year cumulative returns in US dollars. MSCI China index is not the benchmark for all the funds included.

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