With the news that Philip Ehrmann, manager of the £150m Jupiter China fund, is to leave the asset management group, investors may have taken the decision to re-evaluate their holdings.
According to Jupiter, Ehrmann and Kathryn Langridge - who managed the Jupiter Global Emerging Markets fund - have decided to leave to pursue their careers elsewhere but will not relinquish management of their funds until the end of 2014.
“We are sorry to see them go and wish them both well for the future. They will be with us until the end of the year and we would like to reassure our clients that plans are in place, and will be announced shortly, for the future management of these portfolios,” a spokeswoman for Jupiter said.
While China is a contentious investment destination with a series of headwinds often touted as of great enough threat to cause the next global crisis, supporters point to its long term demographic trends.
China bulls state that the rapid urbanisation of China’s 1.2bn people and growth in their real wages will provide a huge boon to its stock markets over the longer term.
Investors have been rewarded over the longer term with the average fund in the IMA China sector up more than 200 per cent over 10 years. However, active managed funds have tended to underperform the index which gained more than 300 per cent over the same period; in fact just two funds out of 12 beat the index over this period.
Performance of sector and index over 10 years
Source: FE Analytics
Willis (pictured), who is a long-term believer in China’s investment potential, says he wants funds that tap into growing domestic demand and the rise of the consumer.
“It is hard to predict what effect the future economic data coming out China will have on the markets and whether it reflects what is actually going on with the companies, so you need to buy and hold funds,” he said. With this mind Willis looks for growth-driven funds with high beta, which he says is similar to the Jupiter China fund under the management of Ehrmann.
Here, we take a look under the bonnet at the funds Willis picks for investors looking to shift their China exposure out of the Jupiter China fund.
Henderson China Opportunities
Willis recommends the £458m Henderson China Opportunities fund as a suitable replacement to the Jupiter fund in part because Ehrmann managed the fund before its current manager Charlie Awdry took over in 2006.
Since Awdry took over the fund it has returned 164.4 per cent, the fourth best return in the IMA China sector. The average fund in the sector made 139.74 per cent over the same period and the MSCI China gained 178.09 per cent.
Performance of fund and index since July 2006
Source: FE Analytics
Willis says Awdry is more mid-cap focused than Ehrmann, which has contributed to the fund’s outperformance and can also mean it experiences high beta at certain times although they share a similar theme with top holdings geared to domestic consumption.
“He is also playing the Chinese consumer story as the country moves its economic model to a more consumer-led economy with a greater share of domestic consumption,” he explained.
“However, he is slightly less bullish than Ehrmann and a little more conservative in terms of stock selection and the cap scale. Ehrmann owned lots of small caps and was a bit punchier, a bit more aggressive.”
Top holdings in the fund include Tencent, AIA, China Construction Bank and China Life Insurance.
The fund has a clean ongoing charges figure (OCF) of 0.89 per cent.
GAM Star China Equity
This $2.2bn fund is held offshore but Willis says it makes a good core holding due to manager Michael Lai’s high conviction approach.
Willis says Lai’s portfolio is relatively concentrated with the 10 largest holdings accounting for 45 per cent of the fund.
“It is a bit more niche than Jupiter China and the top holdings account for a greater portion of the portfolio. He speaks the language and is based in Hong Kong and so may have a greater understanding of the culture,” he said.
“He has a punchier style and is not afraid to take big bets based on his ideas. One of his bets has been Macau gambling stocks which has been really good for the fund but this style has meant taking a hit at times.”
It fund is heavily overweight information technology and consumer stocks, having 9.4 per cent in Chinese eBay equivalent Tencent, its largest holding.
Macau gambling stocks have had a difficult period of late, having lost up to 50 per cent in 2014 as revealed in a recent FE Trustnet story.
http://www.trustnet.com/News/550268/the-hidden-gamble-that-may-be-lurking-in-your-emerging-markets-fund/2/1/ While this has been a recent drag on Lai’s performance, Willis says he continued to hold the stocks suggesting he has a more long-term style.
He adds that if the Chinese economy is going to do well over the medium to longer term, this style should help the manager to outperform.
Since the fund’s launch it has returned 190.16 per cent while the MSCI China has gained 48.61 per cent.
Performance of fund and index since July 2007
Source: FE Analytics
It has an annual management charge of 0.85 per cent and a total expense ratio of 1.05.
