The majority of China funds have underperformed the MSCI China index over five years, according to FE Trustnet
Of the 17 funds in the IMA China/Greater China sector, only five – or 29 per cent – have managed to outperform the index, which is the natural benchmark for any China portfolio. Around half have outperformed over three years, but in the last year only 16 per cent have managed the feat.
Investing in China is notoriously risky, with one drawback for foreigners being the extra restrictions placed on buying and selling stocks in China-listed companies.
This means the market is far more illiquid for foreigners than for the Chinese, and once the risks of corrupt corporate governance are taken into consideration it can be tough for managers to make money.
Among those that have consistently failed to beat the index include some of the biggest in the China/Greater China sector.
The HSBC GIF Chinese Equity fund is the fifth biggest in the IMA China/Greater China sector, with $2.2bn assets under management (AUM).
However, it has returned less than the index over one, three, five and 10 years.
Performance of fund vs indices over 10-yrs
Source: FE Analytics
||1-yr returns (%)
||3-yr returns (%)
||5-yr returns (%)
||10-yr returns (%)
|HSBC - GIF Chinese Equity
|MSCI CHINA 10/40
Over five years it has lost 2.32 per cent, compared with gains of 20.3 per cent from the MSCI China index, which puts it comfortably in the bottom quartile. The fund’s benchmark – MSCI China 10/40 – has returned 20.87 per cent over the period.
On first glance, returns of 223.84 per cent over the last decade look strong; however, the MSCI China index has delivered 310.9 per cent during this time, with slightly less volatility.
Invesco PRC Equity is another serial underperformer. The group’s equity team is held in high regard across a number of areas, but despite the $1.48bn fund being one of the largest of its kind, it has consistently fallen short of its benchmark.
It has gained 1.27 per cent over the past three years, while its MSCI China 10/40 benchmark has made 12.06 per cent.
Over five years it has made 4.12 per cent, compared with the MSCI China 10/40's 20.87 per cent.
The portfolio, run by Joseph Tang, is one of the most expensive in its sector, with a total expense ratio (TER) of 2.45 per cent.
Phillip Ehrmann’s Jupiter China
fund was launched amid much publicity in October 2006. It is one of the few that is UK-domiciled – a major draw for many investors – and it has a minimum investment of just £500.
However, the £186m fund has consistently and substantially underperformed its MSCI Zhong Hua benchmark.
Performance of fund vs indices over 5-yrs
Source: FE Analytics
Over five years it has lost 10.43 per cent, thus underperforming its benchmark and the MSCI China index by more than 30 per cent. Over three years it has fallen short by 16 per cent, and this margin is around 9 per cent over one year.
According to FE data, the fund has seen outflows of more than £30m in the last year.
There are, of course, some managers in the sector that have been more successful.
FE Alpha Manager Martin Lau’s First State Greater China fund is the strongest performer overall, beating its MSCI Golden Dragon index, as well as MSCI China, over one, three and five years.
However, the portfolio has recently soft-closed, meaning that it is no longer open to new investors.
Adrian Lowcock, investment analyst of Bestinvest, warns that even the best managers can have trouble in China due to the volatility of the markets and the extra restrictions placed on them.
"Chinese economic growth does not track Chinese stock market growth," he said.
"Emerging market funds tend to benefit from active managers and need to be judged over the longer time-frames."
"We prefer a more diversified approach rather than focusing on single-country funds."