First State Greater China Growth, Invesco Hong Kong & China (UK) and Schroder ISF Greater China are three funds that have kept investors safest over the past decade, according to data from FE Analytics.
We’re at the start of a new Chinese year – the Year of the Pig – and the last 10 years have represented with something of a roller-coaster ride for investors in Chinese equities, with some strong years giving way to poor performing ones in 2011, 2013, 2015 and 2018.
Indeed, investors may have been better off sticking with more familiar areas over the past decade with the MSCI China index failing to keep pace with developed markets-focused MSCI World.
Over 10 years the China index has made a 195.96 per cent total return, compared with a rise of 227.47 per cent for the MSCI World, as the below chart shows.
Performance of indices over 10yrs
Source: FE Analytics
During that time the average IA China/Greater China fund has made a total return of 191.55 per cent and is slightly behind the MSCI China index, a commonly used benchmark in the sector.
Given the higher levels of volatility that often come with emerging markets, FE Trustnet decided to find out which of the sector’s funds had kept investors safest over the long term.
To do this, we examined funds’ annualised volatility, Sharpe ratio (a measure of risk-adjusted returns, having achieved more returns while taking on no more risk than peers) and maximum drawdown – the most money lost if bought and sold at the worst possible times.
Of the 21 IA China/Greater China funds with a long-enough track record, just three emerged with top-quartile figures for each of the measures.
The three also scored highly for downside risk – a measure of a fund’s potential to suffer a loss in negative market conditions – over the past decade, including two top-quartile performers.
Below, FE Trustnet considers the three Chinese equity funds meeting our criteria over the longer term.
First State Greater China Growth
First on our list is the £442.3m First State Greater China Growth fund, overseen by FE Alpha Manager Martin Lau and co-manager Sophia Li.
Launched in 2003, the growth-focused fund invests in a portfolio of Chinese, Taiwanese and Hong Kong companies and is benchmarked against the MSCI Golden Dragon index.
As well as demonstrating top-quartile volatility (the best of the three at 14.76 per cent), maximum drawdown (also the best, losing 21.91 per cent peak-to-trough) and Sharpe ratio (the highest of the three at 0.78), the fund was one of two with a top-quartile downside risk figure, along with Schroder ISF Greater China.
Over 10 years First State Greater China Growth has made a total return of 309.1 per cent compared with a gain of 230.82 per cent for the MSCI Golden Dragon index – a large- and mid-cap index – as the below chart shows.
Performance of fund vs benchmark over 10yrs
Source: FE Analytics
“Given the emphasis on quality, we can expect the fund to typically lag when the wider market base is chasing riskier stocks,” noted analysts at Square Mile Investment Consulting & Research.
“The upside to such an approach is that their companies have tended to be more resilient in down markets and have, in aggregate, yielded solid riskadjusted returns over the long term.”
First State Greater China Growth currently counts 54 holdings in its portfolio with the largest positions including Taiwan Semiconductor, internet giant Tencent, insurer AIA Group, China Merchants Bank and ENN Energy.
The largest sector allocation is to IT, which represents 21.5 per cent of the portfolio, followed by 17.2 per cent held in consumer names and 12.2 per cent invested in industrials.
It has an ongoing charges figure (OCF) of 1.08 per cent
Invesco Hong Kong & China (UK)
The second entrant on our list is the four FE Crown-rated Invesco Hong Kong & China (UK) fund, run by lead manager Mike Shiao and Lorraine Kuo.
The £347.5m fund builds a concentrated growth-focused portfolio of around 40 stocks using a bottom-up stock selection process. The process avoids state-owned enterprises in favour of private businesses, steering it away from areas such as financials and energy towards sectors such as consumer and technology.
The fund had registered annualised volatility of 16.57 per cent over the 10 years analysed here, lost 23.67 per cent peak-to-trough in this periods and had the lowest Sharpe ratio of the three at 0.61. It was a second quartile performer in terms of downside risk.
“The investment team favours companies with sustainable industry leadership and competitive advantages in their respective fields in Hong Kong and China, and it invests when the companies are trading below the team’s estimation of fair value,” said analysts at FE Invest.
“Overall, the approach is adding value consistently, and investors should stay with the fund for the long term in order to get the best out of its long-term focused strategy.”
The fund’s largest holding is tech conglomerate Alibaba – accounting for 9.18 per cent of the portfolio. Other top holdings include China Mobile, Tencent, medical devices group Shandong Weigao, and drugmaker Sinopharm.
The largest sector position in the Invesco Hong Kong & China (UK) fund is consumer discretionary, which represents 28.13 per cent of the portfolio, followed by communication services at 22.21 per cent.
Over 10 years Invesco Hong Kong & China (UK) has made a 265.37 per cent total return compared with a 217.6 per cent gain for the MSCI Zhong Hua index – a composite benchmark comprising the MSCI China and MSCI Hong Kong indices.
It has an OCF of 0.94 per cent.
Schroder ISF Greater China
Last on our list is the five FE Crown-rated Schroder ISF Greater China fund, managed by Louisa Lo since 2002, making her one of the longest-serving managers in the sector.
The Schroders fund saw annualised volatility of 16.72 per cent over the past decade, would have lost 24.21 per cent if bought and sold at the worst possible times, and had a Sharpe ratio of 0.63.
Lo’s stock selection process is based on growth and valuations but she has recently moved into more defensive positioning given the current backdrop for Chinese companies.
“We remain underweight in technology stocks given uncertainties brought about by regulatory headwinds and scrutiny,” Lo wrote at the start of the year. “We are also positioned in financials, particularly interest rate-sensitive stocks – namely Hong Kong banks with dividend yield support – as well as Chinese insurance companies.”
She added: “While market corrections have seen some value coming through, we have thus far only selectively added to some areas, including conglomerates given attractive valuations and good visibility of earnings trajectory.”
Among the $1.1bn fund’s top holdings are Taiwan Semiconductor, Tencent, Alibaba, China Construction Bank, and Industrial & Commercial Bank of China.
Top sector allocations include financials and consumer discretionary – a significant overweight. Underweight sectors include communications services, real estate and utilities.
Performance of fund vs benchmark over 10yrs
Source: FE Analytics
Over 10 years, the Schroder ISF Greater China – which is benchmarked against the MSCI Golden Dragon index – has made a return of 277.2 per cent, as the above chart shows.
It has an OCF of 1.31 per cent.