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Local business drives Hong Kong equity funds

Hong Kong equity funds with low exposure to mainland-linked companies, such as a product from First State, sit at the top of the performance chart in the sector, according to FE Analytics.

In 2017, measured by the large-cap benchmark Hang Seng Index, the equity market in the SAR returned 40.1%. But in 2018, year-to-date, the return has been -5.15%.

As of 21 August, the First State Hong Kong Growth Fund is the only fund in Hong Kong equity sector with a positive return in US dollar terms, according to FE Analytics.

The fund, incepted in 1999, has an AUM of $178.6m. It is managed by Martin Lau and Richard Jones. The fund has a cumulative three year return of 13.18%, outperforming the sector average of 5.46%.

Luke Ng, senior vice president at FE Analytics Asia, believes the local consumer staples companies provide downside protection for the fund. These stocks include soymilk maker Vitasoy International, gas provider Towngas China, Dairy Farm International and Singapore-listed Jardine Matheson.

“Hong Kong’s stock market includes many companies operating on the mainland, which makes it sensitive to China’s macroeconomics and policies,” Ng said.

“The quality companies, with a strong business focus within Hong Kong, tend to perform better than those that mainly operate on the mainland.”

Quality stocks have driven the Hong Kong market since the second quarter of 2018, he added.

The First State fund also invests 8% of assets in companies listed in Singapore, which tend to be more immune to volatility caused by China’s macroeconomic environment, according to Ng.

“The [First State] portfolio selects quality stocks using a bottom-up investment style. It favours family-owned business with quality, especially the companies with a high level of corporate governance and business operations in line with shareholder interests,” he explained.

He believes the investment style of the managers also justify the long-term outperformance of the portfolio. “The co-managers Lau and Jones invest using a long-term outlook. Their team remains small to facilitate regular discussion and debate on stock selection ideas,” he added.

Another outperformer, Schroder ISF Hong Kong Equity Fund, also shows similar preference in asset allocation.

“The Schroders strategy prefers a sustainable shareholder returns and financial quality over a long term. They seek companies that are expected to improve return-on-capital relative to cost.”


Top and bottom performers versus indices and category average, YTD

Source: FE, in US dollars.

Part of the Mark Allen Group.