Even though the MSCI recently rejected the inclusion of A-shares in its key indices, China remains the dominant market in emerging markets.
And even though Brexit has captured the attention of the developed world, in the background China continues to quietly open the gates to foreign investment through initiatives such as the Mutual Recognition of Funds (MRF) and more recently, the China Interbank Bond Market (CIBM).
Still, there are concerns over China’s foreign debt, given downward pressure on the renminbi. And some analysts believe a credit crisis is looming as GDP growth slows and banks struggle with a rise in non-performing loans.
Against this backdrop, Fund Selector Asia compares two Chinese onshore funds, the Bocom-Schroder Growth Mixed Securities Investment Fund A and the CIFM China Sector Rotation Fund Class A.
Yiming Li, analyst at Morningstar China, provides a comparative analysis.
Investment Strategies
Both funds fall into Morningstar’s “aggressive allocation” category, and they have obtained approval from Hong Kong’s Securities and Futures Commission for sale through the MRF.
The two funds have a similar portfolio allocation, with stock assets accounting for 60-95% of fund assets, with the remaining portion in bonds, money market instruments, warrants and asset-backed securities.
As of the end of 2015, the Bocom-Schroder fund had 77.9% exposure to stocks, while the CIFM fund had 91.0% exposure to stocks, Li said.
The Bocom-Schroder fund has a value-oriented investment strategy and mainly focuses on investment opportunities in fast-growing industries benefiting from China’s economic growth. The manager looks for companies that are expected to have long-term and stable capital appreciation, Li said.
In addition, the fund aims to invest in financial instruments with high liquidity. These include domestic stocks, bonds, money market instruments, warrants and asset-backed securities, he said.
The manager has the flexibility to adjust the allocation to stocks, bonds and money market instruments in response to periodic changes in China’s economy and securities markets.
By comparison, the CIFM fund seeks to achieve stable excess returns over the market’s performance. A big part of the strategy is monitoring changes in China’s economic cycles, which have a big impact on consumer cyclical companies, where the fund has the most exposure.
The manager uses a top-down asset allocation strategy in combination with bottom-up stock selection strategies. The target is companies that have core competitive advantages in their industries, Li said.
“The fund is a mixed securities investment fund with expected levels of risk and return higher than those of bond funds and money market funds, but lower than that of stock funds.”
Sector Weightings
| Bocom-Schroder | % | CIFM | % |
| Technology | 31.1 | Consumer Cyclical | 21.6 |
| Industrials | 27.9 | Technology | 19.9 |
| Healthcare | 15.7 | Real Estate | 14.1 |
| Basic Materials | 14.7 | Consumer Defensive | 13.5 |
| Consumer Cyclical | 8.1 | Basic Materials | 10.2 |
Source: Fund factsheets; Morningstar
Performance
Managers of both funds have a short history managing their respective portfolios, so fund performance may not provide a valid reference for investors looking for long-term performance, Li said.
The Bocom-Schroder fund and the CIFM fund registered returns of -6.7% and -14.2%, respectively, between 1 April 2015 and 31 May 2016, he said.
“The better performance of the Bocom-Schroder fund reflects a better management of risks, especially in times of volatile markets over the past couple of years,” he said.
The Bocom-Schroder fund had a volatility ratio of 33.6% as of the end of 2015, while the CIFM fund had 40.3% during the same period of time, he added.
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Source: Morningstar
