China is dominating the headlines today thanks to news that star manager Anthony Bolton is stepping down from running the Fidelity China Special Situations investment trust next year. His focus on mid and small caps with exposure to the domestic economy has seen the trust outperform the MSCI China index since he started running it back in April 2010; however, the index itself has had a poor run thanks to a slowdown in GDP performance, partly caused by the property sector overheating.
Willis, head of research at Whitechurch, says that investors with a long-term horizon should not give up on China as the fundamentals for long-term growth are still there.
"China still certainly polarises opinion," he said.
"Chinese equities now provide a good entry point, but who is to say they can't go lower from here? The recent economic data hasn’t been very positive and they are trying to sort out their bad loan books in the financial sector."
"Growth is fairly lacklustre, though you could argue that 7.5 per cent is still an impressive number. In terms of valuations, equities are way off their 2007 peaks, so if you take a buy-and-hold mentality – which you should always do – then now could be a good buying opportunity."
"If you are looking for 12-month returns, it is best left alone, but investors should be looking to park their money and leave it there," he added.
With that in mind, FE Trustnet highlights a number of open- and closed-ended funds for investors who are looking for an alternative to Bolton’s fund, or who just want to benefit from cheap valuations in the region.
GAM Star China Equity
"One of our main funds is GAM Star China Equity, which is managed by Michael Lai, who has a good track record," Willis said.
"He tries to tap in to the growing consumer story in China, which means he invests in more cyclical areas of the market. As the fund’s returns can be cyclical, you’ve got to be able to deal with volatility if you want to hold it," he added.
Michal Lai has managed the $1.9bn GAM Star China Equity fund since its launch in July 2007.
According to FE Analytics, the Irish-domiciled fund is the top-performing portfolio in the IMA China/Greater China sector over this time, with returns of 135.94 per cent, beating the sector average by more than 100 percentage points.
Performance of fund vs sector since July 2007
Source: FE Analytics
The fund is also the top-performing fund in the sector over five years and has beaten the sector and its benchmark – the MSCI China Free index – over one and three years.
The fund’s largest sector weightings are to financials, consumer discretionary and information technology.
GAM Star China Equity requires a minimum investment of $10,000 and has a total expense ratio (TER) of 1.58 per cent.
Neptune Greater China Income
Willis admits that GAM Star China Equity is a fairly risky investment, so he highlights Douglas Turnbull’s Neptune Greater China Income fund for a more cautious investor.
"It is an interesting fund that is slightly more defensive than the GAM fund," he explained.
"Turnbull looks for dividend sources, meaning the fund can be quite cyclical, because he looks to areas such as property and financials. As Anthony Bolton knows, corporate governance can be a risk when investing in China, but a reliable dividend is a form of corporate governance in itself."
Turnbull’s £22.9m Neptune Greater China Income fund has returned 15.1 per cent since its launch in December 2009. That beats the IMA China/Greater China sector, which has returned 1.38 per cent, and its MSCI China benchmark, which has lost 3.05 per cent.
Performance of fund vs sector and index since Dec 2009
Source: FE Analytics
Neptune Greater China Income is a top-quartile performer over three years and second-quartile over one.
The fund has an attractive headline yield of 4.06 per cent and our data shows that Turnbull has managed to increase his net distribution over the last year.
Neptune Greater China Income has an ongoing charges figure (OCF) of 2.24 per cent and requires a minimum investment of £1,000.
JP Morgan Chinese IT
Winterflood’s Simon Elliott has favoured the JP Morgan Chinese Investment Trust over Bolton’s trust for some time, though admits they are very different propositions.
"It is a greater China fund, so it doesn’t just invest in China, but also Hong Kong and Taiwan, meaning that the investable universe is far wider. Another key difference is that Bolton tends to focus on mid and small caps, whereas the JP Morgan trust is more mainstream."
"The trust is more appropriate for retail investors looking to gain exposure to the China growth story and has been less volatile than the Bolton vehicle because it invests in larger companies," he added.
JP Morgan Chinese IT was launched in 1993. It is currently run by the team of Howard Wang, Emerson Yip, Shumin Huang and William Tong.
The closed-ended fund has returned 234.35 per cent over 10 years while its benchmark – the MSCI Golden Dragon index – has returned 205.26 per cent.
Performance of trust vs index over 10yrs
Source: FE Analytics
While JP Morgan Chinese IT has matched the index’s returns over 12 months, the £140.2m trust has underperformed against its benchmark over three and five years.
According to the AIC, the trust is trading on a 14 per cent discount to its NAV, which is significantly wider than its 7.5 per cent three-year average. The trust is geared at 15 per cent and has ongoing charges of 1.44 per cent.
