Whilst most emerging market funds will have a high exposure to Chinese equities, Warner says their ability to invest in a wider geographically area will help investors sleep at night – at least until the country tackles slowing growth and financial reform. “I wouldn’t go for a specific Chinese fund at the moment, purely because we don’t know the actual reaction to the Chinese authorities in terms of what they are trying to achieve. Until then I’d prefer an emerging markets fund with a broader remit,” he said.
“Although, China has strong currency reserves and therefore has the potential to sort out its debt problems, we don’t know whether they will do that or leave the currency to appreciate. You are at the whims of politicians.”
“Corporate governance is also a major issue, as many companies are puppets of the state and you don’t know how that will affect the business environment,” he added.
Chinese equities had a strong run in the lead up to and immediately following the financial crisis, helping the MSCI index to deliver a return of 238.9 per cent over a 10 year period. This compares to 88.1 per cent from the MSCI AC World index.
Performance of indices over 10yrs
Source: FE Analytics
However, in spite of the strong long-term returns, the IMA China/Greater China sector has been a tough place to be invested in over the past year, with more than 75 per cent of funds losing money over the period.
Concerns over the impact of the Fed’s tapering programme and a likely rate rise surfaced has coincided with slowing GDP growth in China, and poor returns have followed. Several fund managers and analysts have also warned that its banking sector is vulnerable to a crisis.
The best performing fund in the sector over the past year is the £13m Fidelity China Consumer fund, which has a specific bias to domestic facing stocks.
Since the fund was launched in September 2011 it has returned 25.2 per cent, compared to an average return in the sector of 8.35 per cent and a rise in the MSCI China index of 6.49 per cent.
Performance of fund, sector and benchmark since launch
Source: FE Analytics
The £652m First State China Growth, managed by FE Alpha Manager Martin Lau has been the top performer over three years, returning 14.63 per cent compared to a loss of around 8 per cent from the sector and MSCI China index.
Gordon Smith, fund analyst at stockbroker Killik & Co, says China funds are still a good investment provided they are more focused on consumer stocks. He says they are still likely to boom over the longer-term even if growth continues to level off, and highlights the two funds mentioned above as a good way to play this theme.
“I wouldn’t argue that China doesn’t have issues, but in terms of valuations it is more attractive than it has been for a long time,” he said. “As a contrarian play it makes sense for someone with a longer term investment horizon.”
“You still have attractive growth from the consumer names, which you can get exposure to via First State China Growth and Fidelity China Consumer funds. [Both are less focused on] the industrials sector, which is largely causing the slowdown.”
For beginners who are less comfortable investing in specialist funds, he says IMA Global Emerging Markets is still a good hunting ground.
“China would be quite a big part of most emerging market funds anyway and so even if you buy an emerging market fund you’re still buying heavily into China,” he said.
“You do diversify away some of China’s risks with a fund that has a broader remit with a greater number of long-term themes.”