A wave of government stimulus over the past month has reminded investors that yes, China is still an investable destination despite years of near-unanimous coverage to the contrary.
Though the details are vague and the overall effect on stock prices temporary, we do wonder whether this could mark a turning point for allocators to engage more with the region.
The average allocation to Asia and emerging markets – of which China is but one component – stands at just 4 and 4.5 per cent respectively among the DFMs in our database.
So this week we decided to look at the dearth of China-only funds in portfolios, especially given the relative popularity of other single-country funds.
It strikes us as somewhat odd that portfolio managers have been fine holding Japan-only funds in the years when this region was little else but a deflationary drag on returns, but are unwilling to take single-country risk in China – the economic powerhouse of the two.
Even single-country India funds are slightly more popular with DFMs, so it’s certainly worth a moment’s consideration.
We asked around to find out why this is so.
Ben Seager-Scott, chief investment officer at Forvis Mazars, said what holds him back is twofold: the ongoing investment case of the nation, and the desired level of granularity in portfolios.
“China is re-opening the stimulus taps because its economy is stalling quite badly, and its attempt at a finessed stimulus has failed,” he said. “This is hardly a compelling reason to invest, and comes against a backdrop of a potential re-ignition of a US-China trade war in a country which does not have a great track record of rewarding external shareholders.”
“That is not to say there will never be a compelling case for China, but rather the discount one must apply to investing in the country is pretty steep already – or put another way, it’s cheap for good reason.”
In terms of China-only funds, then, our database shows the following: First Sentier All-China is held by two allocators, while Fidelity China Special Situations trust and Fidelity China Consumer are each held by one allocator apiece.
The only other fund held by anybody we follow is Allianz China A-Shares, held by Parmenion.
“China A-shares have differentiated risk adjusted returns versus the EM asset class, being a low beta and often counter cyclical market, and similarly having a lower correlation to developed markets,” said chief investment officer Peter Dalgliesh. “Over time we believe this adds to our aim of delivering greater consistency of risk adjusted returns for clients, albeit over the last couple of years it has been a drag until very recently.”
He added, though, that the go-to strategy for most allocators is to outsource expertise to emerging market fund managers, who can lever overweights and underweights more flexibly than having to trim an entire fund.
