The Matthews China Small Companies Fund has continued to lead the pack of 152 China or Greater China equity products authorised by Hong Kong’s Securities and Futures Commission. It has consolidated its premier position as top performing fund in these two categories over three years, by posting the strongest returns among its peers during the first six months of 2020, according to FE Fundinfo data.
The $285m fund, managed by California-based Tiffany Hsiao, generated a 51.77% return between 1 January and 30 June, compared with an average 2.78% by dedicated mainland China funds, and 6.29% by Greater China funds which have the flexibility to invest in Taiwan and Hong Kong-listed stocks.
The fund’s top sectors include healthcare and information technology (IT), which are both expected to be beneficiaries of the post-Covid-19 Chinese economy, and in fact, shares in two IT companies – Silergy and Kindee International Software — comprise 12% of its portfolio.
Hsiao, who has been lead manager of the fund since 2015, explained her strategy in a podcast earlier this year. She tries to identify Chinese companies that should prosper as Sino-US geopolitical tensions escalate.
“These are companies helping China to become more self-sufficient, helping to source critical parts of new economy infrastructure,” she said, citing semiconductor, software and biotech small caps are three examples.
Hsiao emphasised that China needs to build its semiconductor industry in order to grow the “new economy”, which includes internet businesses and tech innovations such as smart cars, robotics and 5G gear.
However, although the Matthews fund ostensibly has a small-cap (that is, less than $3bn) investment mandate, 58% of its portfolio is made up of mid-cap stocks, according to the most recent factsheet. That is a significant divergence from the fund’s benchmark MSCI China Small Cap index, which has 91% weighting to small-caps.
Perhaps, it’s just as well that Hsiao has bet against her benchmark. The index was down 1.75% in the first half of this year and has posted a 3.04% cumulative loss over three years, compared with the Matthews fund’s 101.13% positive return during the same period, according to FE Funinfo.
The second best performer since the start of the year, the Fullgoal China Small-Mid Cap Growth Fund (46.93%), has also restricted its exposure to smaller companies, with almost 80% of the portfolio invested in stocks with market caps of at least $2bn, according to its factsheet.
Matthews China Small Companies Fund – Top 10 holdings
Matthews China Small Companies Fund – sector allocation
Meanwhile, the CSI 300 index of leading China-listed stocks has surged 13% over the last six trading days, riding on the unexpected 25 basis point cuts to re-lending and re-discount rates and stronger-than-expected property sales data in June. Average daily market turnover, the margin financing outstanding balance and northbound trading have all picked up, reflecting an improvement in market sentiment, noted UBS Global Wealth Management today.
The firm expects “further low-teen upside for the index in the next 3-6 months”, driven by buoyant earnings estimates for next year rather than a valuation re-rating.
On the other hand, Nicholas Yeo, head of China equities and manager of the Aberdeen Standard China A Share Equity Fund, notes that the recent sharp rally in China’s CSI 300 index reminds us this is an inefficient, retail-driven market. Investors will see more periods of overbuying”.
He warns investors “not to follow the market blindly”, but to take advantage of opportunities to buy “quality companies in consumer discretionary and consumer staples, health care and financial services”.
In a recent webinar, Michelle Qi, chief investment officer, equities, China at Eastspring Investments said in a recent webinar. argued that China A-share market gives investors access to the stocks of a large number of companies unavailable either in Hong Kong or as US ADRs, and also stressed their relatively low correlation to the performance of other equity markets.
She favours the healthcare sector, because the government intends to increase investment in the public health system, and private healthcare spending will accelerate as people become more aware of preventive treatments; the consumer sector, with domestic brands (guo chao) becoming more popular because of the launch of new online platforms and overseas travel restrictions; and the technology sector, as demand continues to grow for data consumption which should boost cloud computing services, 5G infrastructure spending and strong demand for IOT devices.
However, asset and wealth managers have been uncharacteristically shy about expressing views about the possible ramifications China’s imposition of a national security law on Hong Kong.
On the other hand, Angelo Corbetta head of Asian equities at Amundi, is unlikely to encounter PRC censure or sanction for noting that “[the] sweeping security law should quell protests and lead to better economic stability in the near term, but the longer term impact on emigration is yet to be felt”.
Best performing China/Greater China funds* in first-half 2020
1 Jan-30 Jun 2020 return
|3-year cumulative return||
3-year annualised volatility
|Matthews China Small Companies||
|Fullgoal China Small-Mid Cap Growth||
|E Fund Mgmt (HK) Greater China Leaders||
|BOCOM International Dragon Core Growth||
|CUAM China Hong Kong Strategy||
|China sector average||
|Greater China sector average||
|MSCI Golden Dragon||
|MSCI China Small Cap||
Source: FE Fundinfo. Data in US dollars. *SFC-authorised; **since fund launch 11 Jan 2018