HEAD-TO-HEAD: E Fund vs CMS

123456

Both funds invest predominantly in fixed income, but as it is common with such funds in China, they are allowed up to a 20% allocation to equities to try and boost returns.

“E Fund’s strategy combines the top-down and bottom-up approach,” said Ng. “They have built a sizeable research team to do credit analysis.”

In-house credit analysis gives the fund manager an edge as credit ratings in China are not reliable, according to Ng.  “When you look at credit rating agencies onshore, over 90% of bonds are rated AA or above,” he noted. “It doesn’t mean much for investors.”

With an artificially low default rate, the bond market does not have reliable information on the creditworthiness of different instruments, said Ng.

Local government funding vehicles (LGFVs) emerged in China’s debt market about three years ago, noted Ng. “E Fund saw this as a big opportunity,” he said. “LGFV holdings in the E Fund portfolio reached about 50%.”

While many asset managers considered the many LGFVs essentially similar to one another, according to Ng, E Fund set up a task force to analyse them in depth and assist the fund manager in picking the best ones. “This is how they added value in 2014 and 2015,” he said.

In 2016, however, E Fund began to wind down their LGFV investments, uncertain about their continuing viability.

“CMS, by comparison, relies more on the top-down strategy, as well as the allocation strategy, to make the investment decisions,” Ng said, adding that the firm puts less resources into credit analysis than E Fund does.

“Since they started managing the fund in 2012, they mainly invest in large state-owned enterprises (SOEs), mainly big names,” Ng said. “They pay more attention to sector selection and have less focus on individual companies.”

Both funds can invest up to 20% of their assets in equities. “E Fund normally won’t go over 10%,” said Ng. FE data show that neither fund held equities at the end of April 2017.

The CMS portfolio is highly concentrated, comprising 17 holdings, with the top five – all convertible bonds – each amounting to 9%-10% of the portfolio.

The high concentration is common for RMB fixed income funds, according to Ng. The E Fund portfolio, with 24 holdings is slightly less concentrated. Its average yield to maturity is 5.1% and the duration is 1.39 years.

“In 2016, the E Fund managers became more cautious on the debt market,” said Ng. “They focused more on high quality bonds, reduced the number of holdings and lowered the portfolio duration.”

123456