China equity: A case for active management?

Data-backed research shows that very few active fund managers outperform their benchmarks and the passive products based on them in the long run. But emerging markets are recognised as the arena where active managers have more opportunities to exercise skill.

The case in point is China’s equity market. While putting together the list of best- and worst-performing mutual funds and exchange-traded funds (ETFs) available for sale to investors in Hong Kong and/or Singapore, FSA noted that the top of the list is dominated by actively-managed funds, while the bottom is full of ETFs.

Our sample included China, Greater China, Hong Kong and Taiwan equity funds with a minimum three years of track record and at least $100m in AUM.

China’s equity market, characterised by under-researched companies and short-term retail investors driven by rumour and emotions, creates opportunities for managers who are willing to put in the effort to research it in depth.

Bin Shi’s trifecta

The top three best performing China equity funds are all managed by Bin Shi, a Hong Kong-based fund manager at UBS Asset Management. He has been managing the largest of the three, the Luxembourg-domiciled UBS (Lux) Equity China Opportunity Fund, with $5.3bn of AUM, since 2010.

Shi uses a benchmark-agnostic, buy-and-hold approach, in which he “identifies current and potential industry leaders in a few secular growth sectors that he believes are under-represented in the index”, according to Claire Liang, analyst at Morningstar.

His strategy has resulted in outperformance. However, the fund charges a relatively high fee, 2.41% annually.

Best performing China equity funds

Worst performers

The worst performer is an actively-managed fund from First State Investments, managed by Martin Lau.

However, most of the funds on the bottom are passive vehicles. It is worth noting that the poorly performing ETFs are based on the CSI 300 index of companies listed domestically, in Shanghai and Shenzhen, and on the Hang Seng China Enterprises Index of companies listed in Hong Kong (as H-shares), which excludes new economy companies such as Tencent.

While the CSI 300 returned only 0.48% over the last three years ending 31 March, the MSCI China index, consisting of Chinese companies listed abroad, returned 35.8%.

The low performance of the CSI 300 doesn’t paint the whole picture, however. The three years saw periods of exuberance and market crashes, especially in mid-2015. Three years ago, the CSI 300 was already inflated, heading for a peak in early June but subsequently crashed and has since recovered only partially.

Worst performing China equity funds