China’s stock market is characterised by high risk and differentiation from traditional key markets.
Driven by retail investors, it has high volatility and can spike and drop steeply. In March 2015, for example, China’s A-share market soared 60% to June, followed by a 50% plunge the following month.
Managers will often add that the China market also has government policy influencing the direction of stocks.
Therefore, instead of looking at past performance as the main criteria for assessing strong fund management abilities, FSA looks at information ratio.
The information ratio measures how much excess return is generated from the amount of excess risk taken relative to the benchmark.
Over the past three years, the Allianz China A shares fund has the highest information ratio in the Hong Kong sector of China equities. However, the HSBC fund has the third highest IR while maintaining below median volatility.
Top five China equity funds by information ratio
| Information ratio | Volatility | |
| Allianz China A-Shares | 0.91 | 26.15 |
| HSBC China Momentum | 0.83 | 21.19 |
| Schroder China Equity Alpha | 0.76 | 26.64 |
| UBS (Lux) Equity China Opportunity (USD) | 0.59 | 19.18 |
| BlackRock China A-Shares | 0.55 | 25.23 |
| China equity sector median | 0.17 | 21.52 |
Source: FE. Annualised ratios for the trailing three years to October 13. All fund NAVs are converted to US dollars.
Finally, bringing in performance for the trailing three years, all five funds had strong outperformance versus the sector (chart below).
It could be that these five products were the best managed China equity funds over the last three years.
The IR, however, does not reveal how exactly the manager outperformed. It could have been due to investment skill, luck, a couple huge positions that had price appreciation or even one event.
For fund selection teams, that would no doubt be a key topic of discussion when meeting the fund manager.
Performance of funds with the top five information ratio scores vs sector
