Star china fund’s recipe for success

Charlie Awdry made Gartmore China Opportunities the best-performing investment fund of 2007 by focusing on good domestic consumer companies - a strategy he continues to back.

This year’s City bonus season is going to fall a long way short of the £19 billion bonanza last year as the credit crunch takes its toll. But one man who must surely be confident of a decent payout is Gartmore’s Charlie Awdry.

He is the man behind the best-performing investment fund of 2007 – Gartmore China Opportunities. In a year when the average unit trust limped in with a gain of about 5% before charges, Awdry’s fund knocked out a 69.4% gain.

And it’s not a tiddler taking racy bets to secure a top quartile ranking. The fund is now one of the bigger beasts in the emerging markets jungle, with more than £730m under management. With figures like this it will not be long before it joins the select club of £1 billion-plus retail funds.

Of course, Awdry has been in a sweet spot. Virtually all the top-performing funds this year were in China (although Allianz’s Bric All Stars fund secured third place) but most were in the 45%-55% range. Only Jupiter’s China fund came close to challenging Awdry for top position.

The question on everyone’s lips is whether it can continue, especially after what many saw as a long overdue shakeout in the Shanghai market late last year and the growing risk of an American recession.

I expected Awdry to say that, of course, these returns can’t be repeated and to take a rather cautious view of the year ahead. But far from it. He remains confident that the fund can continue to outperform strongly, even if Wal-Mart stops buying quite so much from China.

The trick, he says, is to avoid export-orientated Chinese stocks, ignore the overheated Shanghai-quoted stocks and concentrate on quality domestic consumer spending plays. And don’t get too excited about the Olympics in Beijing this year. Some commentators think the China bull market will enjoy its last frenetic run ahead of the games, then expire rapidly after that. But Awdry is more sanguine.

“From an economic point of view, Beijing is less than 5% of the Chinese population and the economy. The Olympics as an event is just a small pimple in the economic growth story of China. It’s more of a ‘coming-out’ party for the country.”

Awdry’s big bets for 2008 are on Chinese consumers beginning to spend some of the vast wealth they have built up in recent years. But it’s not just the malls of Shanghai he is thinking about. He is more interested in the stocks benefiting from low-income families taking their first steps to becoming fully-fledged Western-style consumers. For example, he holds Parkson, which runs department stores across the country. “It’s the best department store operator in China, offers a great shopping experience and is very profit-focused. If it finds that a brand is not selling in its stores, it is soon shown the door.”

Another favourite is Li Ning, named after the Chinese gymnast who picked up three gold medals at the 1984 Los Angeles Olympics. He founded a company that is now one of the most successful clothing chains in the country, with more than 4,000 stores already and new ones opening every week.

Li Ning sells low-price sportswear in China’s smaller cities and towns, and the strategy has paid off handsomely. The company is worth close to £2 billion after its shares on the Hong Kong stockmarket doubled during 2007.

But alarm bells do ring when fund managers tell me about the potential of the Chinese consumer. It’s not a new story. Isn’t everybody buying these stocks, and aren’t they already grossly over-priced? Li Ning, for example, is currently trading on a multiple of 72. Perhaps it is not entirely fair to compare it to British retailers when they are so in the doldrums, but you can buy the likes of JJB Sports on a multiple of 14. The growth prospects in China are great, but are they really that great?

Awdry insists that Li Ning still offers value compared with its western equivalents. “Between 2001 and 2005 per capita urban incomes in China grew at a rate of 15% a year,” he says. “More people are moving to the cities, and in the cities incomes are rising. They are much more confident about using credit cards and taking out mortgages. These stocks may look expensive in the short term but in a way they have always looked expensive. What you are seeing in China is a secular, long-term growth story that makes those sort of P/E [price/earnings] ratios acceptable.”

Financial stocks such as China Construction Bank, Industrial and Commercial Bank and China Life Insurance are the biggest part of Awdry’s portfolio. In part they reflect his consumer theme: high lending growth, high margins and restructuring. They have also withstood the credit crunch that has hit bank shares elsewhere. Chinese banks rather sensibly had no exposure to American sub-prime mortgages.

That said, the banks have enjoyed such a good run that in recent months Awdry has begun to peg back his holdings.

The single biggest holding is China Mobile, at 8.9% of the fund. It is the sort of mega-stock that China managers have to make the right call on. Most managers hold it for domestic growth reasons – a gazillion new subscribers signing on each year. But Awdry sees it differently. Regulatory and restructuring moves have left the Chinese telecoms market virtually under the control of China Mobile, giving it immense pricing power as well as long-term growth.

Another of Awdry’s big holdings is China Coal Energy. “Coal is the source of 75% of China’s energy consumption, and it’s very difficult to see how they are going to be able to move from that. We think the outlook for coal prices is pretty robust and it is something we have invested in across Asia.”

Awdry is not anti-environment (he also holds a solar power company in the portfolio), he is just a dispassionate money manager. He looks after the money from London, supported by a team of Gartmore analysts he says are the best in the industry. Early emerging markets managers were all about passion for the region and its prospects, rather than cool analysis, and many failed. The new generation like Awdry may be rather better at rewarding investors in the future.

PATRICK COLLINSON – The Guardian Personal Finance Editor