China’s onshore funds have been gaining more attention from international investors as China continues to open its markets through initiatives such as the Mutual Recognition of Funds, which started about a year ago.
Other drivers for foreign interest in China’s markets are the stock connect program and the possible inclusion of China’s A-shares on key MSCI indices, which is expected to be decided this month.
Another camp of foreign investors is particularly negative on the mainland for a variety of reasons. Concerns over a brewing credit crisis, which some have compared to the US subprime meltdown, is one. Downward pressure on the RMB after a surprise devaluation last August and slowing GDP growth are also cited as reasons to be sour on China.
But there is one thing investors seem to agree on: China’s economy and markets are now far more important to global investors than in previous years.
Against this backdrop, Fund Selector Asia compares two Chinese onshore funds that are awaiting approval for sale to foreign investors in the Hong Kong market through the MRF initiative: the Fullgoal Tianhui Selected Growth Mixed Type Fund and the Lombarda CN New Blue Chip Dynamic Asset A Fund.
Yiming Li, analyst at Morningstar China, provides a comparative analysis.
Investment Strategies
Both funds fall into Morningstar’s “aggressive allocation” category, according to Li. These funds invest mainly in stocks, bonds, and money market instruments and do not belong to either equity fund or bond fund categories.
The Fullgoal fund is an actively managed, open-ended fund incorporated in China.
The objective is to maximise capital appreciation over the long-term. The investment portfolio can consist of 50-95% stocks, and 5-50% bond and short-term financial instruments.
“Currently, the fund invests 90% of its portfolio in stocks,” Li said.
The Fullgoal fund’s investment process has consistently focused on growth stocks. The manager adopts fundamental analysis and bottom-up research to select individual stocks that display specific growth characteristics, strong company management and attractive value, he said.
Sector focus is on pharmaceuticals, life sciences, food and beverage plays, information technology, chemicals and property, Li said.
Turning to the Lombarda fund, Li said it has an appealing long-term investment strategy and effective downside risk management.
The fund uses both top-down and bottom-up approaches in portfolio construction by taking into consideration factors such as macroeconomic conditions, government policy, capital flow, corporate earnings and valuation, he said.
But a comparatively high portfolio turnover results from flexibility in sector allocation and individual equity positioning, based on market conditions and cycles.
Currently, the fund invests 60-80% of its portfolio in stocks. Exposure to stocks is lower compared to the Fullgoal fund and therefore the Lombarda product has a more steady performance during times of market volatility, Li said.
The manager looks for sectors he believes are likely to show strong earnings growth over the next two years.
For example, the portfolio had sector overweights in pharmaceutical, information technology, and electronics companies between 2013 and 2014. These stocks have been among the biggest contributors to the fund’s performance, according to the fund’s fact sheet.
“The Lombarda fund has a more diversified portfolio and reviews asset allocation more frequently compared to the Fullgoal fund,” he said.
Sector Weightings
| Fullgoal | % | Lombarda | % |
| Basic Materials | 19.96 | Consumer Defensive | 27.06 |
| Consumer Cyclical | 18.71 | Healthcare | 26.43 |
| Technology | 17.17 | Industrials | 16.05 |
| Consumer Defensive | 13.12 | Consumer Cyclical | 9.28 |
| Financial Services | 9.24 | Utilities | 6.25 |
| Industrials | 9.06 | Technology | 5.57 |
| Healthcare | 6.36 | Real Estate | 5.18 |
| Real Estate | 5.03 | Basic Materials | 4.17 |
| Communication Services | 0.69 | ||
| Energy | 0.56 | ||
| Utilities | 0.10 |
Sources: Morningstar, firms’ factsheet, as of the end of 2015
Performance
The Lombarda fund has outperformed the Fullgoal fund over the last three years in terms of cumulative returns (see chart below).
Looking at annualised returns, for the year 2015, the Lombarda returned 25.1% and the Fullgoal fund returned 24.6%, according to Li’s data.
Volatility is a key reason. “The higher proportion of stock investment in the Fullgoal portfolio means that the fund has tracked the volatility in the China market.”
Fullgoal has a sharpe ratio of 0.79 and Lombarda’s is 1.02, according to Li’s data.
Morningstar awarded the Fullgoal fund a four-star rating and the Lombarda product a five-star rating. The three-year downside risks are classified as “relatively low” for Fullgoal and “low” for Lombarda.
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Three-year cumulative performance of the two funds. The impact of market volatility on Fullgoal’s product became evident in the second half of 2015.
Source: Morningstar
