The US-China trade war might have tempered investor sentiment towards Chinese equities in the short term but Willis Owen’s Adrian Lowcock argues that a powerful investment story is in place over the long run. 
China is the world’s second largest economy after the US and the Chinese Republic is celebrating its 70th birthday. But recent headlines have centered around the tit-for-tat trade tariffs between China and the US, overlooking the continued economic development being implemented by the nation.
Lowcock, head of personal investing at Willis Owen, said his firm remains positive on China although the geopolitical landscape makes the short term uncertain.
“China has been through a vast modernisation programme over the last decade in particular and the investment story has changed over that time as it moves from a manufacturing to a consumer-focused economy,” he said.
“Clearly in the short term, the new variable is the relationship with the US, which has become far more strained than previously and the next few years may look different to previous ones as the People’s Republic moves into its 71st year,” he explained.
Performance of indices over 15yrs
Source: FE Analytics
“It is particularly important to recognise that although China has more than 160 cities with a population of over 1 million people, its overall urbanisation rate is still relatively low at 60 per cent. This compares to 80 per cent in the likes of the US and the UK, and these figures are expected to converge over the next 20 years as more and more people move to cities.”
With this backdrop in mind, Lowock highlight three funds that he thinks are good options for playing the next stage of China’s economic development.
First State Greater China Growth
His first pick is the £492.8m First State Greater China Growth fund, which is headed up by FE Alpha Manager Martin Lau and Helen Chen. The four FE Crown-rated fund is an all-cap strategy with a relatively concentrated portfolio of 55-60 names.
“The team applies a tried-and-tested bottom-up stock-selection process to look for quality companies that deliver sustainable growth at attractive valuations,” Lowcock added. “The focus is on absolute return, a low portfolio turnover and they don’t follow benchmarks.”
It is overweight sectors like information technology, industrials and consumer staples, with top holdings including Taiwan Semiconductor, Tencent Holdings and AIA Group . The absolute return mindset means it can lag in more risk-on environments, but analysts see the fund as a lower-risk strategy for Chinese equity exposure.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Over the past three years, the fund has generated a total return of 42.32 per cent – ranking it sixth out of 36 funds in the IA China/Greater China sector and outperforming its MSCI Golden Dragon benchmark by 10 percentage points.
First State Greater China Growth has an ongoing charges figure (OCF) of 1.05 per cent.
Fidelity China Focus
Next up is Jing Ning’s $4bn Fidelity China Focus fund. This is a very different offering to the First State fund as the manager has a benchmark-aware approach with a clear bias towards the value style of investing.
Lowcock added: “Ning focuses on companies that have been disregarded by the market due to economic or company-specific reasons, but have the potential to turnaround over the long run. Ning has demonstrated her ability to add value in Chinese equities over the longer term whilst sticking to her value approach.”
Specifically, Fidelity China Focus seeks out companies that have quality business models and/or management teams which are out of favour due to short-term macro factors but should be beneficiaries of China’s structural growth dynamics.
The portfolio’s largest overweights are to the energy, materials and financials sectors, with underweights in consumer discretionary, communication services and utilities. Its top holdings are China Construction Bank, China Mobile and Alibaba Group.
Over the past three years, the fund has made a third-quartile total return of 31 per cent, compared with 32.46 per cent from its average IA China/Greater China peer. However, this has been a difficult period for value investors; since Ning took over the fund in November 2013 she has made 101.11 per cent against 76.30 per cent for the sector.
Fidelity China Focus has a 1.06 per cent OCF.
Janus Henderson China Opportunities
The third strategy highlighted by Lowcock is the £1.3bn Janus Henderson China Opportunities fund, which has the aim of providing both capital growth and income.
“Charlie Awdry favours an active and relatively unconstrained approach, but he is kept abreast of portfolio risks by the internal team,” he said.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
“Portfolio construction for this fund follows the manager’s views of the industry and company’s and can result in large differences to the benchmark. Turnover is relatively high as a result of decisive action that is often taken when industry views and near-term expectations change.”
Awdry has a growth bias, looking for companies which he believes will post earnings growth that is not anticipated by the wider market and are trading at attractive valuations. Top holdings include Alibaba Group, Tencent and Ping An Insurance.
Janus Henderson China Opportunities has an OCF of 0.86 per cent and is yielding 1.10 per cent.