Chinese equities often take investors by surprise because they are more driven by government policy than market forces. Chinese authorities have intervened during market plunges, imposing, for example, a temporary suspension of initial public offerings, a market “circuit breaker”, a halt in the shorting of stocks. and other measures that startled investors.
In addition, the surge of retail investors in China’s markets after the Hong Kong Shanghai Stock Connect launch has fuelled wild market swings. The resulting high volatility, combined with slowing GDP growth, has supported pessimism and wariness about China from many developed market investors.
Against this backdrop, FSA compares two Chinese equity funds – the Matthews Asia China Dividend Fund and the Robeco Chinese Equities Fund.
Luke Ng, senior vice president of research at FE Advisory Asia, provides a comparative analysis.
Investment strategy
The Matthews Asia fund was launched in January 2013, while the Robeco Chinese Equities fund was launched in October 1997.
The two funds are domiciled in Luxembourg and both use the MSCI China Index as the benchmark for performance measurement.
The Matthews Asia product takes a bottom-up approach, identifying Chinese companies that have the ability to pay dividends and deliver dividend growth over a three-year period, Ng said.
“That involves an initial stock screening to identify businesses with strong free cash flow and profitability, which are yielding at 2% or above. They also arrange meet-ups with management to access their business models and the willingness to keep up the dividend payment and the pay-out ratios,” he said.
The Robeco fund incorporates an environmental, social and governance (ESG) assessment in its investment selection process, which helps to evaluate business sustainability. ESG assessements can also minimise the long-term risks and protect minority shareholder interests.
“Due to the differences of the investment philosophies and processes, portfolio compositions are quite different among the two funds,” Ng said.
For example, the Matthews Asia product is significantly underweight information technology stocks, and has no exposure to the IT giants, including Tencent, which is the top constituent stock of the MSCI China Index, Ng pointed out.
“Matthews does not consider Tencent as a bad company, but this is not a candidate that fits into the fund’s process and desired attributes.”
The team also does not have a strong preference for financial stocks, in particular Chinese banks, due to their transparency concerns, nor property stocks, which don’t pay dividends on a regular basis.
The team favours the consumer discretionary sector, supported by expectations of long-term income growth in China, which will boost spending. The fund is overweight industrial stocks, but these stocks are mainly invested in because they are linked to consumption plays.
Looking at the Robeco fund, it has a much stronger focus on large caps, and tends to favour more on the new economy sectors, such as the information technology, consumer discretionary and healthcare stocks, he said.
“The portfolio is positioned to benefit from the long-term growth trend in consumer and services sectors, as well as the reforms, which should deliver greater efficiency and earnings prospects,” Ng said.
Sector comparison:
| Matthews Asia | % | Robeco | % |
| Consumer Products | 31.40 | Financials | 38.95 |
| Financials | 20.80 | Telecom, Media & Technology | 27.96 |
| Industrials | 16.80 | Consumer Products | 10.30 |
| Telecom, Media & Technology | 15.60 | Basic Materials | 7.06 |
| Healthcare | 4.50 | Indusrtials | 6.77 |
| Money Market | 3.90 | Healthcare | 5.59 |
| Basic Materials | 3.50 | Money Market | 1.90 |
| Utilities | 3.50 | Utilities | 1.57 |
Sources: FE Analytics; firms’ factsheet
Performance
Ng converted both funds to US dollars because he wants to solely focus on the fund managers’ performance, but not the product features such as currency risk.
“We believe it is more justified to have the two funds compared with the same currency,” he said.
Because the two funds have different investment strategies, they also have different performance patterns, he said.
“With a stronger focus on the growth area, the Robeco fund outperformed Matthews in 2013 and 2014, when the market was generally in an uptrend.
“On the other hand, the Matthews Asia fund has registered strong returns since late 2015, when market sentiment reversed, as its dividend-focused strategy offered stronger downside protection,” he said.
The Matthews Asia fund also has lower volatility:
| Volatility % | |
| Matthews Asia | 14.57 |
| Robeco | 22.05 |
Source: FE Analytics
Matthews Asia versus Robeco over the last three years
