Fund Briefing: China

21 September 2017
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China’s transformation has been remarkable. Its rapid modernisation has seen it become a manufacturing hub with first-class infrastructure and innovative social networks.

However, this extraordinary growth has come at a price, according to Gary Greenberg, head of emerging markets at Hermes Investment Management. “It has also resulted in burdensome corporate debt, environmental pollution and unprofitable state-owned enterprises (SOEs),” he says.

His expectation is that China faces an inevitable transition from the stratospheric growth of the recent past to a mid, and eventually low, single-digit growth rate.

However, Adrian Lowcock, investment director at Architas, points out that even 7% growth outstrips any developed market. “The country is still developing and we are seeing a shift from the manufacture and export led economy to one of growing domestic demand and consumption,” he says.

He adds that this move is proving to be quite dramatic with online retail sales having grown at 26.2% in 2016, and a staggering 28 million cars bought that year. “There has never been an economic transition on the same scale in history,” he says. “The demand for everything from toothpaste to smart phones is potentially staggering.”

Technology is a good example. “We have seen Chinese equivalents of Amazon, eBay, and Facebook dominate their home market, so investors need to access these businesses,” he says.

Looking ahead, Mr Greenberg at Hermes expects China to encounter challenges as it moves from an export-led, state owned dominated economy to a technology driven world leader.

However, he is hopeful there will be opportunities for investors to make money.

“There does appear to be several reasons for cautious optimism,” he adds. “By focusing on companies producing high-value-added goods and on leading their fields at a global level, China may well flourish in the coming years.”

Don’t underestimate China’s potential for growth

The potential on offer to investors is a significant point that can get overlooked, agrees Darius McDermott, managing director of Chelsea Financial Services. “It’s easy to forget the sheer size of China’s population – around 1.4 billion people, so more than four times the size of the United States,” he says. “As China’s middle class expands, the potential for consumer spending growth is enormous.”

In fact, the consumer-led economy is showing progress with healthcare, education, car sales and entertainment enjoying some decent growth.

The population is also becoming better educated with an abundant supply of university leavers who are paid significantly less than graduates in other parts of the world. “This means the Chinese benefit from highly educated but also quite cheap labour,” Mr McDermott points out.

Worrying factors to consider

However, the country still has plenty of major issues to tackle and this makes China something of a conundrum for investors. Mr McDermott cites the country’s huge debt problem as one of the key issues playing on investors’ minds. “The state-owned companies, which are being propped up by some of this debt, are dragging the economy down - and corporate debt has increased,” he adds.

It’s an issue the Government is trying to tackle. “The only problem is weaker companies that, perhaps, should go bust – such as those in the coal and steel industries - are being propped up,” says Mr McDermott.

Elsewhere, US President Donald Trump’s protectionist trade stance is also worrying, given how much of China’s growth over the past decade has come from cheap exports.

However, it’s a potential beneficiary of PresidentTrump’s decision not to proceed with the Trans-Pacific Partnership – a 12-country agreement excluding China, that would have put the US as the central trade power in the Asia region. “This has given China the opportunity to promote its own Regional Comprehensive Economic Partnership, a proposed trade deal between south east Asian countries,” adds Mr McDermott.

How to invest

Investors wanting exposure to this area are drawn to the IA China/Greater China sector, which is for funds with at least 80% of assets in equities of China, Hong Kong or Taiwan.

There is £2.3 billion invested in this sector – considerably less than the 167.2 billion in IA UK All Companies or even the £57 billion in IA Europe excluding UK.

Investors shunning it will have missed out because it’s been the best performing sector over the past year with a 32% average return, according to Morningstar data to 1 September 2017. While the standout funds have returned an impressive 46% over the period, even the worst have achieved more than 20% over this period.

However, Patrick Connolly, a certified financial planner with Chase de Vere, believes the potential downsides of China make buying a dedicated fund unattractive. “While investors should have some exposure to China, because of the high risks we don’t recommend any specific Chinese investment funds,” he says. “It’s sensible to have a broad based emerging markets fund.”

He suggests looking at funds such as Fidelity Emerging Markets (a member of the Moneywise First 50 Funds), JPM Emerging Markets, and Standard Life Global Emerging Markets Equity Income.

How much should I invest in this sector?

Low risk: 0%-2%

Medium risk: 2%-5%

High risk: 5%-10%

Quick guide: Is this area right for me?

Consider investing in this sector if…

  • You have a large portfolio
  • You have a tolerance for high risk as returns will be volatile
  • You want more exposure to China than on offer from emerging markets funds

One to watch: Jupiter China

This fund aims to achieve long-term capital growth by investing in Chinese companies, as well as those earning a decent amount of revenue in the country.

Ross Teverson
 

Ross Teverson (above), who has managed the fund since January 2015, focuses on companies undergoing some form of positive change that’s not reflected in the share price.

Adrian Lowcock, investment director at multi-manager Architas, likes Mr Teverson’s high conviction and unconstrained approach.

“He invests in a concentrated number of companies in his fund which is biased towards small and medium-sized companies,” he says. “This allows him to identify areas of value missed by other investors and differentiates the fund from peers focused on larger caps.”

Currently, the fund is 48% invested in large cap companies, with 28% in small caps and 22% in the mid-cap area of the market. The fund’s 10 largest holdings, which combined make up 41% of assets under management, include Bank of China, Tencent Holdings, and Longfor Properties.

Technology has the largest sector allocation of 20%, followed by 18% in industrials, 16% in financials, 13% in consumer services and 11% in consumer goods. The other areas represented, which each account for a share of less than 10%, include health care, telecommunications, and oil and gas.

Fund: Jupiter China

Manager:  Ross Teverson

Launch date:  20 October 2006

Fund AUM: £136 million

Minimum initial investment:  £500

Minimum top up investment: £250

Initial charge: (up to) 5.25%

Ongoing charge: 1.06%

Jupiter China Acc

Value of £100 invested in the fund over six years

Year

2012

2013

2014

2015

2016

2017*

Total return in year %

11.87

19.88

2.37

5.55

10.56

19.39

Value of £100**

£112

£132

£134

£140

£150

£170

Notes: * to 1 September, 2017 ** at end of the year, after being invested at the start of 2012.

Source: Morningstar

Rob Griffin writes for The Independent, Sunday Telegraph and Daily Express.

Read more from Rob Griffin.

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