Baillie Gifford China, Schroder ISF Greater China and Henderson Horizon China are among some of the funds that held up in past downturns in the Chinese market, which might prove interesting as it comes under further pressure.
The MSCI China index has been one of the strongest performing single market indices of recent years and the funds that invest in it have made some of the Investment Association’s highest average returns over 2017 to date.
The index is up by 68.41 per cent over three years, as the below chart shows, but it has struggled more recently after a strong run, raising concerns among some investors.
Performance of MSCI China over 3yrs
Source: FE Analytics
The last time the MSCI China index saw significant underperformance was at the end of 2015 and the beginning of 2016, when the sell-off had a significant impact on global equities.
More recently, the index fell by 4.12 per cent over the month to 8 December compared with a flat 0.58 per cent return for the MSCI World index (in sterling terms).
“A couple of years ago worries about China caused the last major correction in stock markets around the world,” wrote Oliver Jones, markets economist at consultancy Capital Economics recently.
“With the MSCI China index plunging recently, could this be about to happen again? Possibly, but because that plunge is not connected to worries about China’s economy, any fallout is unlikely to be as severe or last as long.”
The economist noted that the 2015/2016 was the bursting of a bubble in China’s domestic stock markets, which was linked to fears of a “hard landing” in its economy. Concern over how this would affect other economics then sparked a global equity rout.
Jones added: “This time, though, worries about China’s economy taking a dramatic turn for the worse do not appear to be at the forefront of investors’ minds, despite the weakness of the MSCI China index.”
Concerns appear instead to be linked to valuations in the Chinese IT sector, said Jones and shares listed offshore – of which the index is largely comprised – have been disproportionately affected.
However, what are the options for investors concerned about a wider Chinese market downturn? While past performance is no guide to the future, we looked at how Chinese equity funds held up during the last sell-off.
FE Trustnet considered the funds that have outperformed the MSCI China index over the past three years with top quartile Sharpe ratios (measuring risk-adjusted returns) and a top quartile maximum drawdown (which measures the most money lost if bought and sold at the worst possible times).
Source: FE Analytics
It should be noted, however, that while the MSCI China index is the most common benchmark in the IA China/Greater China sector, not all funds use it as a measure.
Below, FE Trustnet explores some of the Chinese equity funds that have performed well despite the market downturn.
Baillie Gifford Greater China
Topping the table for returns, the five FE Crown-rated Baillie Gifford Greater China fund, managed by Mike Gush and Sophie Earnshaw, is first on the list.
The £115.3m fund – launched in 2008 – has returned 89.28 per cent in the three years to 11 December, the second best performer in the sector overall during this time frame.
The portfolio is built around 40-100 stocks with the managers taking a five-year time frame and a strong preference for growth stocks. It is supported by bottom-up analysis of the Baillie Gifford emerging markets team.
The fund is not benchmarked against the MSCI China index and instead uses the MSCI Golden Dragon index, a large- and mid-cap index listed on Chinese, Hong Kong and Taiwan exchanges.
Of the funds in our study it has the worst maximum drawdown figure having lost 24.04 per cent for the past three years. However, it has the highest Sharpe ratio over the same period, achieving more return without taking on significantly more risk than its peers.
Baillie Gifford Greater China has an ongoing charges figure (OCF) of 0.82 per cent.
Henderson Horizon China
Next on the list is the four crown-rated Henderson Horizon China fund, managed by Charlie Awdry and May Ling Wee.
The $222.4m fund has been overseen by lead manager Awdry since 2015 and over three years has returned 83.08 per cent.
The fund targets long-term capital growth and seeks out companies with the potential to experience greater price changes over the long term than is currently reflected in market prices.
It also can make use of derivatives to take long and short positions. No more than 35 per cent of its assets will be held in China A Shares.
Performance of fund vs sector over 3yrs
Source: FE Analytics
It has the second highest Sharpe ratio over the three-year period and a maximum drawdown of 23.7 per cent.
Henderson Horizon China has an OCF of 1.92 per cent and carries a performance fee payable on 10 per cent of the outperformance of the MSCI China index.
Schroder ISF Greater China
The four crown-rated Schroder ISF Greater China fund has also performed strongly over three years, returning 80.81 per cent.
The $1.1bn offshore fund has been managed by Louisa Lo since 2002 and invests at least two-thirds of its assets in equities of companies located in China, Hong Kong and Taiwan. It too is benchmarked against the MSCI Golden Dragon index.
Additionally, the fund also has a top quartile downside risk (an estimate of a fund’s potential loss in negative market conditions).
Its largest exposure is to the IT sector, representing 37.7 per cent of the portfolio. Like many of its peers the large, liquid IT companies are well represented in the portfolio – which may be a concern for those wary of this sector.
Indeed, internet giants Tencent (9.7 per cent) and Alibaba (8.3 per cent) are the top two holdings while memory specialist Taiwan Semiconductor Manufacturing (8.3 per cent) rounds out the top three.
Schroder ISF Greater China has an OCF of 1.32 per cent.
Pictet Greater China
Lastly, the Pictet Greater China fund is the final fund on our list. Managed by David Chen and James Kenney, the fund has returned 73.22 per cent over three years.
It has the best maximum drawdown of the four funds, losing just 22.91 per cent if bought and sold at the wrong times. Like the Schroders fund, it also has a top-quartile downside risk figure.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The $211.6m three crown-rated fund was launched in 2012 and focuses on valuations with a long-term capital growth target. It is benchmarked against the MSCI Golden Dragon index.
“The outlook for the Greater China region remains positive but still requires vigilance on old and new concerns,” the managers noted recently.
“Valuations in Greater China remain compelling, especially compared with developed markets. Against this backdrop, we continue to find companies with strong returns, earnings growth higher than the market and compelling valuations.
“Recent volatility has provided us with opportunities, and we continue to look to take advantage of market fears to acquire companies whose intrinsic value is ignored amid the market moves.”
Pictet Greater China has an OCF of 1.05 per cent.