The China funds beating the emerging market downturn

Gazzard-Steve-IFP-2013

Emerging markets have suffered in recent months on concerns over slowing economic growth and US tapering, although a number of China-focused funds have been able to avoid the downturn.

The six-months to 5 August 2013 saw the average fund in the IMA Global Emerging Markets sector lose investors 5.73 per cent. The IMA China/Greater China sector has fared a little better with an average fall of 0.88 per cent – although some portfolios have bucked the emerging market trend and made a positive return.

The MSCI Emerging Markets index lost 6.89 per cent over the six months to 5 August, compared with the 12.69 per cent gain seen in the MSCI World and showing a clear gap in performance between emerging and developed markets.

However, funds with a Chinese focus have performed significantly better than the declining MSCI EM index with the £198m Invesco Perpetual Hong Kong & China leading the pack after rising 11.73 per cent over the six-month period.

This fund, co-managed by Mike Shiao and Lorraine Kuo, is also first quartile fund over one, three and five years – with FE Analytics showing it as  returning 39.31 per cent over five years to 5 August.

Hargreaves Lansdown senior investment manager Adrian Lowcock says: “[The Invesco Perpetual Hong Kong & China fund] has been quite steady but in the last year it has been quite dynamic in terms of asset allocation. It has been quite volatile but it has picked up quite significantly in just six months.”

The fund, along with a number of other China funds, has significant exposure to consumer products. The fund has 24.09 per cent of its portfolio in consumer discretionary stocks, with another 15.23 per cent in consumer staples.

Bestinvest senior research analyst Ben Seager-Scott also says these consumer stocks are benefitting from government efforts to switch China from a consumer economy and minimise dependence on exporting to the West.

Seager-Scott adds: “A lot of consumer stocks are starting to look expensive. That is a trend with the whole Asian region.

”Their valuations are quite high and their prices is a key determiner. At the moment, because there is a lot of exuberance, there is a risk if you go in now you lower your upside. You would instead wait for the valuations to come down.”

Other China-focused funds that have done will include Raymond Ma’s £8m Fidelity China Consumer fund, which also has a heavy bias to Chinese consumer products and recorded a six month performance of 7.37 per cent.

The £1.7m Neptune China Special Situations fund, co-managed by Robin Geffin, and Douglas Turnbull, has also benefitted from a high weighting to consumer products of 45.80 per cent with a six-month performance of 6.04 per cent.

Co-managed by Richard H Gao and Henry Zhang, the $366m Matthews China Small Companies fund – a Luxembourg-domiciled Sicav – has recorded performance of 5.74 per cent over six months.

Managed by Charlie Awdry, the £378m Henderson China Opportunities fund has also done well over the past six months with a performance of 4.69 per cent – though this fund’s consumer exposure is small compared to other sectors.

Lowcock is mindful of some of the risks investing in China poses, with the country still struggling to make the large transition from export to consumption – with added political and shadow banking risks along the way.

“Most investors are better off getting global emerging market funds – for the majority of investors that would give them more than enough Chinese exposure and give managers more flexibility,” he says.

The top 10 China funds outperforming over the past six months

Fund Return (%)
Invesco Perpetual Hong Kong & China  11.73
Fidelity China Consumer 7.37
Neptune China Special Situations  6.04
Matthews China Small Companies  5.74
Henderson China Opportunities  4.78
Ignis International China  4.34
Threadneedle China Opportunities  4.03
First State Greater China Growth 2.83
Jupiter China  1.56
Baillie Gifford Greater China  0.44

Source: FE Analytics