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China funds wary of bank stocks

An examination of the holdings of equity funds authorised for sale to retail investors in Hong Kong finds that there is little enthusiasm for China bank shares.

There are around 100 actively-managed SFC-registered China funds available, and not one of them hold all four of the major Chinese banks, according to FE Analytics data.

This is despite the 23.14% weighting of the financial sector in the MSCI China Index, and the presence of the top four lenders in the MSCI China A-Share Inclusion Index (that is, Chinese shares that will be included in the MSCI Emerging Markets Index on 31 May).

A recent report by Natixis found that “the soundness of Chinese banks remained relatively stable in 2018 against a background of lower growth and laxer monetary policy” as the authorities pressed for more bank credit to stimulate the private sector.

However, it warned that although there has been progress towards improving the banks’ balance sheets, “it is hard to tell whether there will be enough time to complete the clean up before more bad assets pile up…as a new credit binge takes place”.

Of course, some funds, such as ETFs and mutual fund index trackers, are forced to have some exposure depending on their benchmark index, and funds with a specific mandate to invest in financial stocks have little choice.

However, actively-managed funds in general prefer to make allocations to so-called “new economy” stocks, including the technology giants, such as Tencent and Alibaba.

China’s big four banks are arguably well-protected from cascading loan defaults or massive failure by the state. But that, and even the relatively high historical dividend pay-outs by the big four banks, appear to offer little incentive to invest. 

Expanding the actively-managed fund universe to include the 68 SFC authorised emerging market funds, only eight funds have a more than a 1% weighting each to two of the banks, and none have a 1% or greater allocation to three of them, according to FE Analytics data.

China Construction Bank (CCB) is the most popular, held by 70 equity funds in the China and emerging markets categories.

In these two categories, the Zeal Voyage China Fund has an 8.64% weighting, and the Harvest China Equity Fund an 8.39% allocation.

Bank of China is owned by 25 funds, and the Zeal Voyage China Fund has the biggest weighting (6%) followed by Blackrock GF China with a 4.59% allocation.

Twenty-three funds hold Industrial and Commercial Bank of China (ICBC). The biggest weighting is made by the HSBC China Growth Fund, which has a 9.55% allocation and the HSBC China Momentum Fund has a 6.23% weighting.

The least popular is Agricultural Bank of China, which is held by 11 funds across the two categories. The Matthews China Fund has a 4.8% weighting, and the next biggest allocation is the Invesco PRC Equity Fund with a 3.51% holding.

Unfortunately, there is no obvious relationship between the long-term performance of China funds and their weightings to the financial sector. HS China Equity has the best three-year cumulative return and a 14 percentage points overweight position in financial stocks. Like three of the other top funds, it has a substantial holding in Ping An Insurance, whose stock price has risen 138% in the three years to 3 March 2019, according to data from MarketWatch.

However, the fourth best performer, the Invesco China Focus Equity Fund has barely any allocation to financials.


Profile of Top Five Performing China Equity Funds

Fund

3-year cumulative return %

Information ratio

Financial sector weighting %

HS China Equity

82.79

1.14

37.34

UBS Equity China Opportunity

79.89

1.27

26.36

Aberdeen Standard SICAV China A Share Equity

74.83

1.10

22.87

Investec All China Equity

74.13

1.22

23.60

Invesco China Focus Equity

71.49

0.96

Negligible

*MSCI China Index

65.35

23.14

Source: FE Analytics, 5 March 2016 – 1 March 2019. In US dollars.
*MSCI China Index is not the benchmark for all the funds listed and is for reference only.

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