China has rarely been out of the news since its “Black Monday” correction in 2015 caused ripples in the global economy. More recently, the Trump Administration’s ongoing trade war with the country has amplified volatility in equity markets generally and China-based securities in particular.
China volatility higher than other classifications
Looking at the average of the monthly rolling three-month volatility of various IA fund classifications (over five years to June 2019), the IA China/Greater China classification has been 46% more volatile than the IA North America classification, 62% more volatile than the IA UK All Companies classification, and 216% more volatile than the IA Mixed Investment 40-85% Shares classification.
In addition to this higher level of volatility, investors wishing to obtain exposure to China must also consider the unique complexities of the different regional markets. Hong Kong “H-shares” have very different liquidity characteristics from those listed on the Shanghai and the Shenzhen Stock Exchange (“A-shares”), and these differences need to be accounted for.
Exhibit One. Top performing IA China/ Greater China Investment funds ranked over 3-years (with 5-year history – to June 2019)
Source: Lipper by Refinitiv, Lipper for Investment Management. Past performance is not a reliable indicator of future performance.
Plenty of choice, but beware performance variability…
There are now nearly 40 funds in the IA China/Greater China classification, which gives investors a reasonably deep universe of choice for the region (interestingly there have only been four fund launches since Black Monday), but variability of performance is considerable. In the three years to the end of June 2019, there has been a difference of 49.8 percentage points between the best and worst performing funds.
Exhibit Two. Three-month standard deviation of selected IA classifications (rolling monthly) for five-years to July 2019
Source: Lipper by Refinitiv, Lipper for Investment Management.
Look for strong Consistent Return and Total Return scores
Importantly, there are several funds in this classification which exhibit strong Consistent Return Lipper Leaders metrics over five years. A good Consistent Return score combined with a strong Total Return score is a robust signal of fund manager skill. Good consistency of performance is even more credible when markets (such as China) have exhibited more volatility.
It is a dangerous investment strategy to select funds on past performance alone. Chasing returns alone is rarely a successful strategy. In this instance, the poor Preservation scores that we see across the board for five years serve as a stark reminder that the risk of losing capital in this region is considerable. The loss in one fund of nearly 10% in the year to June 2019 despite good three-year performance is revealing.
China is a complex, volatile region. Don’t rely on short-term metrics
However, we are examining five-year Lipper Leaders metrics which allow for the “washing out” of some shorter-term volatility. The funds in this month’s table should warrant some further investigation as a potential long-term investment.
The China/Greater China classification is one of considerable opportunity, but also complexity and volatility. An active fund manager with strong five-year Lipper Leaders scores is probably a decent place to start for any investor considering a fund in this region.
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Disclaimer:
This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. Past performance is no indicator of future performance.
