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Stock-pickers thrive in 1H China market turmoil

Funds managed by bottom-up stock-pickers are performing well in China's volatile markets while momentum-driven funds are at the bottom end, according to data from FE Analytics.
Fund approvals soar in Hong Kong

The Chinese equity markets are facing headwinds due to investor concerns about a potential US-China trade war and an increase in bond default cases.

The MSCI China Index returned -1.38% during the first six months of 2018. But only 32 out of a total of 157 China/Greater China equity funds (both active and passive products) delivered a positive return, according to data from FE Analytics.


Fund sector 1H return
China equity -6.36
Greater China equity -2.23
MSCI China Index -1.69
Source: FE. Average sector returns in US dollar terms to 30 June.

The funds that have done well despite the negative sentiment in the first half are mainly managed by bottom-up stock pickers and long-term investors who are focused on structural themes, said Germaine Share, associate director for manager research at Morningstar.

“With the portfolio managers we have spoken with, they actually enjoyed this environment a lot more because they see more sources of alpha compared to last year and more investment opportunities in the sectors that were out of favour last year,” she said.

Best performing China equity funds

Data: FE, cumulative returns in US dollars, as of 30 June 2018. Funds available to investors in Hong Kong.

Share cited as examples the UBS (Lux) Equity China Opportunity Fund and the First State China Growth Fund (the 7th best first half performer with a 3.74% return).

“These two funds are managed under a benchmark-agnostic approach. They are very active managers with long-term views. Once they identify a key structural theme that they like, they will stick to it.”

The UBS fund emphasizes the China education theme while First State embraces a long-term domestic consumption theme, according to Share.

Another feature of the top ten funds is their exposure to small companies.

“Unlike 2017, many outperforming stocks are smaller companies this year, such as software developer Kingdee and online automobile platform Autohome,” Share said.

The top performer, the Matthews Asia China Small Companies Fund, invests in companies with a market capitalisation under $3bn. The UBS and the First State funds tend to include some small-cap holdings as well, she added.

Luke Ng, senior vice president at FE Advisory Asia, believes Chinese equity fund managers will continue to take profit from their internet holdings and broaden their allocation to other sectors, such as the fast-growing education and consumer stocks.

“Market corrections can create some buying opportunities for managers with a long-term perspective,” he said.

The bottom five

The worst performer is an actively-managed fund from BOCI Prudential, a joint venture between BOC Group Trustee and British insurer Prudential. Other funds on the bottom are products managed by Chinese firms.

FE’s Ng said the fund management style difference between Chinese and global managers justify the under-performance. “Chinese asset managers tend to go after the short-term upside in the equity market. However, predicting market movement is not easy,” he said.

By comparison, global firms generally aim to beat the market over the long-term and ignore temporary market noise. Global managers tend to believe companies will revert to their intrinsic value as long as solid fundamentals are in place, Ng said.

Morningstar’s Share agreed that Chinese asset managers tend to follow short-term market trends.

She took the Zeal Voyage China Fund as an example. The fund, acquired from another Hong Kong-based firm Value Partners, employs a short-term strategy. The fund’s turnover can reach 300%-400% and the manager’s preference for frequent stock trading leads to a more volatile portfolio, she added.

Worst performing China equity funds

Data: FE, cumulative returns in US dollars, as of 30 June 2018. Only actively-managed strategies are shown.

Part of the Mark Allen Group.