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WMs prefer active funds for China exposure

In China's inefficient equity market, active management is preferred to passive investing, according to wealth management sources.

“Passive products are more effective in efficient and liquid markets coupled with a well represented index,” Kevin Liem, CIO at CBH Asia, told FSA. “They are good investment vehicles for US large cap stocks representing the S&P 500, for example.”

Liem added that the Chinese equity market, in contrast, is less developed and tends to have higher volatility because it is driven by retail investors. Chinese indices are also less representative of the broader market because they are typically dominated by large-cap financial institutions such as state banks.

“That does not mean Chinese passive ETFs do not have value, they just are less effective,” Liem said. “Hence we prefer active funds for this asset class.”

Oreana Private Wealth’s CIO Isaac Poole agrees. “It would be a very large mistake to access the returns possible in China using index funds and ETFs because you are going to get returns that disappoint,” he told FSA.

“There are significant opportunities for skilled managers who know the market well, who have been there for a long time, who are specialists in looking at single name credits and equities.”

For best results, the managers and analysts have to be on the ground and be able to meet with company management, Poole said. Oreana uses asset management firms that are headquartered in Hong Kong but have offices in mainland China.

“We are not looking for China managers based in the US or Europe,” he said.

Poole sees the exposure to China in a client’s portfolio as an opportunity for return, but because of the risk it is appropriate to have smaller holdings. “We think that 10% of the portfolio would be maximum we’d be comfortable with,” he said.

To maintain such exposure, direct access to Chinese A-shares is not necessary. “It can be gained, if you think of equities, in H-shares (Chinese companies listed in Hong Kong) or companies that are Chinese but listed in the US,” he said.

Top performing China equity products

(ETFs highlighted in red)

For the trailing 5-year period, an investor was better off with an active fund…

Fund 5-yr Return
UBS (Lux) Equity China Opportunity Fund 139.1%
HS China Equity Fund 118.4%
HSBC China Momentum Fund 115.1%
Matthews Asia China Small Companies Fund 102.1%
HS China B-share Focus Fund 99.4%
Harvest MSCI China A 50 Index ETF 94.0%
Harvest China Equity Fund 94.0%
Fidelity China Focus Fund 91.9%
HS China A Share Focus Fund 89.6%
HSBC China Growth Fund 89.1%
Source: FE Analytics, cumulative returns in US dollars, as of 27 June 2018, for funds registered for sale in Hong Kong.


…but the 3-year period shows an ETF was the best investment

Fund 3-yr Return
XIE Shares FTSE Chimerica ETF 68.2%
UBS (Lux) Equity China Opportunity Fund 46.1%
HS China Equity Fund 43.1%
Matthews Asia China Small Companies Fund 39.5%
Invesco China Focus Equity Fund 34.6%
First State China Growth Fund 31.6%
Matthews Asia China Dividend Fund 29.9%
HSBC China Momentum Fund 27.6%
Matthews Asia China Fund 25.8%
Mirae Asset Horizons MSCI China ETF 22.5%
Source: FE Analytics, cumulative returns in US dollars, as of 27 June 2018, for funds registered for sale in Hong Kong.

Part of the Mark Allen Group.