In mid-2015, the fund exited its positions in mainland banks. He is not shorting banks, even though he believes their long-term outlook looks bleak.
“The Chinese government may come out with a program of recognising or selling the non-performing loans to asset management companies,”the London-based manager told FSA. “If it’s done well, the bank shares could do very well. But the predictability of that event is very difficult.”
He targets mainly the “unsexy companies” which are more mature and have relatively slow growth but attractive pricing. These are mainly private enterprises with strong cash flow and credible management, he said.
He aims to avoid the same targets as China’s retail investors, who tend to concentrate on trading the “sexy companies” with high earnings growth and high valuations.
The MSCI decision on whether to include A-shares into its flagship emerging markets index, expected to be announced on June 15, is not a trigger to buy A-shares, Awdry added.
The fund currently holds roughly 10% in Shanghai-listed stocks via the stock connect.
As for largest holdings, they include internet giant Tencent and insurer AIA Group, accounting for 9.7% each as of the end of April, according to the latest factsheet.
Weightings on these companies have been going up for the past two to three years, he said. “These companies have a very strong franchise or a competitive position in the industry they operate. We are not making a bet on their corporate earnings, we are taking a view that over the years they can generate sustainable earnings growth.”
Growth during a slowdown
The Chinese economy has been muddling along the past two-and-a-half years, he said. “In difficult times, the strong companies get stronger, and the weak would get weaker and die out.
“I don’t see any quick fixes that could make everyone feel more confortable with China. China is going to be a tough proposition for people to understand for quite a long time. It is actually a reasonable hunting time, as the macro is turning people off from the micro.”
While Blackrock’s Andrew Swan said China’s supply-side reforms could benefit the energy and materials sectors, Awdry said although the policy is sensible, “by and large, the financial positions of these companies are weak, and for investors, it is very limited in terms of what you can buy”.
For instance, the aluminium and steel firms have poor cash flows, he said. Selective names in the cement sector, such as Anhui Conch Cement, are included in the portfolio as Anhui is much more profitable with strong balance sheets compared to other operators. The cement company is also able to buy assets in India, “one of the few companies that could buy anything because it has decent cash flows”, he added.
Awry’s fund is also allowed to take short positions, “on companies where the industry outlook is deteriorating or poor.” One example, he said, is the global outsourcing industry.
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The Henderson fund versus the MSCI China over the past three years:
