Staying on course in China’s volatile market

Yuen, who has been at Invesco since 2004, manages the Invesco PRC Equity Fund. Before assuming co-management of the fund in 2015, he was part of the Greater China and Asia team. Since 2008 has also co-managed the Asia Consumer Demand Fund.

“The biggest lesson I learned is really about having conviction [in your investments and processes] and riding through the periods of time when things are not in your favour,” Yuen told FSA.

He recalls years ago that he would shift his investment style during periods of short-term volatility.

“This would always come up in the bosses review because they see how the portfolio’s style could shift.

“You have to ride through some of the short-term volatility, especially since our process is medium- to long-term focused,” he added.

Investment process

The Invesco PRC Equity Fund, which has a concentrated portfolio of around 30-35 stocks, has an average holding period of two years or more, according to Yuen.

It invests in offshore Chinese stocks, such as Hong Kong H-shares, ADRs and, using QFII quota, China A-shares. The fund does not include ETFs in the portfolio, Yuen noted.

Ten full-time investment professionals look at the Greater China market, including Yuen and Mike Shiao, who is the co-manager of the PRC Equity Fund and the firm’s chief investment officer for Asia ex-Japan. 

Investment staff have an average of 16 years of investment experience, Yuen said.

To find investments, the team uses a monitoring list with 150 names. Criteria for screening includes projections on how much a company’s fair value will be for the next three years, Yuen said.

The fund also puts a heavy weighting on quality, such as corporate governance. According to Yuen, the team meets with companies, analyses board of director structures to check whether board members are not family members or friends, and cross-checks a company’s strategy and performance with its industry peers.

“Sometimes, they would give you some indication that they are not telling the truth, such as when these companies keep on recording, for example, a 50% margin but the rest of the competitors only have 25%,” he said.

Sector allocation

The fund has a heavy overweight in both the consumer discretionary and consumer staples sectors.

Consumer discretionary accounts for 24% of the fund, versus the fund’s benchmark index (MSCI China) of 10.3%. Consumer staples account for 9.8% of the fund, versus the benchmark’s 2.3%.

“We want to look for industry growth and companies that are growing, so we find that most of them are tied to consumers, whether it is services or consumer goods,” he said.

Yuen added that incomes continue to rise in China, providing top-down support for the consumer sector.

On the flipside, he does not like sectors such as energy and materials, which are cyclical in nature, or those dependent on global demand factors, as well as those that are tied in government policy.

The real estate industry faces government policy risk, while utilities, such as solar and water, are dependent on policy-driven subsidies, he said.

The fund is underweight real estate (2.4% versus the benchmark’s 4.3%) and has no holdings in energy, materials and utilities.

According to Yuen, given the fund’s quality bias, the fund does well in periods when the market is down.

However, the fund’s performance is likely to decline at the beginning of a bull market as low quality companies rally, he said. 

Shanghai team

Last month, Invesco was granted an investment management wholly-foreign owned enterprises (IM WFOE), Yuen said. The IM WFOE allows a foreign asset manager to raise and manage domestic capital in China.

Yuen said the firm plans to have analysts and researchers based in Shanghai this year.

Yoshihiko Kawashima, an associate director covering consumer sectors, will transfer to Shanghai in the second half this year to head the research team. Three more analysts are expected to be added in Shanghai, Yuen said.

Annual discreet performance of the fund was better in 2015 when the index and the sector were down, according to FE data. However, it had negative returns in 2014 when the market and sector were up. 

Discreet annual performance

Source: FE Analytics