by Dewi John.
The Year of the Ox is but a tottering calf, so now is as good a time as any to cast a (bull’s) eye over Chinese equity funds. Puns intended, and no hint of an apology.
Last year, Chinese small and mid caps were the best-performing fund category, returning more than 70%. This was met with huge enthusiasm, as UK investors put all of £1m into this category. That is ‘million’, yes. China equity, which delivered more than 30% over the same period, did rather better in terms of flows, at more than £1bn for both Equity China and Equity Greater China Lipper Global Classifications.
What, then, can investors expect from Chinese equity funds in the Year of the Ox?
China was the one major economy that came out of 2020 (broadly aligned with the Year of the Rat*) with positive GDP growth, and is expected to rebound strongly.
You may be as sceptical of the veracity of Chinese data as you are of horoscopes, but cast your eye around office or home (the same things these days) and count the sheer amount of stuff that issues from China. That gives an indication of the options open to investors in China—whether Tencent or cement.
As Joachim Klement observes, the ancient Middle Kingdom is faced with escaping from the middle income trap. It has a plan—Made in China 2025—to address this, bound up with the much-vaunted New Silk Road. China has a strategic position in the global economy that no other outside of the global north elite nations ever has. And it is moving up the value chain, having been the largest buyer of industrial robotics since 2014, for example. It is the regional centre of gravity, as Asia’s return correlations with China have increased in both equity and foreign exchange markets since the global financial crisis. There should be more to come, as China is underweight in equity and bond indices relative to its GDP.
But no plan survives contact with the enemy, and China has some pretty big ones, having had to contend with an escalating trade war with the US over the past few years. While Trump is gone, bipartisan hostility to China is a characteristic of US policy, and will remain a constraint.
Chart 1: Top performing Chinese Equity Funds Over Three Years (%)
Source: Refinitiv Lipper. Total return to January 31 2021
Despite these broad opportunities, UK investments into Chinese equity funds have been rather narrow. Some £1.49bn has flowed into such vehicles over the past three years. That in itself is quite modest, and the bulk of one-year and three–year flows has been taken by just three fund share classes: Baillie Gifford China B Acc (£454m), Allianz All China Equity WT-GBP (£310m), and Ninety One GSF All China Equity JX Inc GBP (£206m) for one year. None of the others across these two classifications have taken more than £100m over the 12 months to January 31. The top three asset gatherers over the past three years look very much the same, and a quick look at flows for the three funds show that all the action has been in the past 12 months.
The largest funds haven’t been the ones to attract assets over this period, with the three above being outside the top 10 by total net assets—albeit just, in the case of Ninety One.
The top three-year performer has been none of these (although only the Baillie Gifford fund has a three-year history), but FSSA All China B. Although the fund has almost doubled in size over the past year, it’s from a low base: at £43m it’s a minnow. Despite all the noise over China’s BATs (Baidu, Alibaba and Tencent), its largest sector is industrials (24.5%). Tencent is a 3% holding, and fairly low down the stock list.
This is followed by Veritas China GBP A (79.1% over three years), a long-short hedge fund, and itself only £70m.
Hot on its heels, however, comes Baillie Gifford China C Inc, at 79%, with the other share classes following in quick succession. We’re back in familiar China stock territory here, with the two top holdings being Tencent (9.5%) and Alibaba (9.2%). It’s also got a Lipper Leader consistent return score of 5—the highest possible.
It’s notable that most returns across these two Lipper Global Classifications have been over the past year, with average one–year returns being 47.4%, while the three-year average is 37.2%, indicating just how strongly the Chinese market bounced back from COVID. Rats are, after all, notoriously agile creatures. It remains to be seen whether the solid old ox can continue this bull run.
Or maybe we shouldn’t read too much into these ‘animal spirits’.
* As was the 2008 global financial crisis—maybe there’s something in this Chinese astrology stuff.
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