Best and worst China equity funds of the decade

Bin Shi, UBS Asset Management

The $1.7bn Allianz China A-shares Fund, managed by Anthony Wong, and the $3.7bn First State China Growth Fund, run by Martin Lau, also generated triple-digit returns during the decade, demonstrating that stock selection in China’s retail- and momentum-driven equities markets can add significant value.

Lau’s fund, like Shi’s, invests in a mixture of A-shares and foreign-listed China stocks across the full capitalisation range, while Wong’s more restrictive A-share mandate has meant his fund has had to seek alpha without the impetus provided by foreign investor backing for the technology giants.

Seven other funds — all active — trounced the MSCI China Index during the past decade, and included funds managed by Value Partners, HSBC, Threadneedle, BOCHK, Standard Life, Fidelity and Hang Seng. The index, which includes A-shares and H-shares as well as other foreign listed China large- and mid-cap stocks, generated a 71.99% cumulative return with dividends reinvested, and a 31.38% return excluding dividends.

The contrast between the 8.78% drop in the price level of the Shanghai Composite Index and the 31.38% price gain by the MSCI China Index indicates the positive contribution of foreign-listed China shares to fund performance.

However, stock-pickers in the domestic market were able to generate alpha by avoiding some of the state-owned monoliths that make-up much of the Shanghai index, and focus on so-called “new economy” technology and healthcare companies that are represented by the Shenzhen Composite Index, which rose almost 45% during the decade, according to Bloomberg data.

Certainly, it didn’t pay to invest in low-fee China tracker funds. Ten of the worst 12 performers were passive funds or ETFs, and had little protection against the volatile market swings of the decade, especially the extraordinary boom-and-bust in 2015. Index investors also had to endure the impact of the escalation of the US-China trade dispute throughout 2018, and slower China economic growth last year.

Although commentators have focused on the inevitable inflow of foreign money into Chinese stocks as more of them are included in benchmark indices, past performance suggests that the clever money should go to active managers who have the resources to make off-index bets, rather than passive funds which replicate a momentum-driven index.