China is forecast to be one of the dominant markets over the coming years and could present a huge opportunity, but how the three investment trusts focused on the country compare?
China is the world’s second largest economy and is forecast to have the second best Covid recovery, according to the International Monetary Fund (IMF). It has forecast 8.1% GDP growth for China in 2021. In contrast the US is forecast 5.1% growth.
The strong recovery has been grounded in early, effective management of the Covid outbreak – which originated in Wuhan– combined with “forceful public investment response” and copious central bank liquidity, the IMF said.
This rosy picture has been recently threatened when Chinese regulators clamped down on education-tech stocks which sparked a major sell-off of Chinese tech names, reflected in the indices below.
Chinese indices vs global benchmark since start of July 2021
Source: FE Analytics
The IT China/Greater China sector was consequently the worst performer in July and its three members – JPMorgan China Growth & Income, Baillie Gifford China Growth Trust and Fidelity China Special Situations – all experienced losses due to their tech exposure. All the trusts hold tech stocks Tencent and Alibaba in their top 10s, for example.
This “white knuckle ride” for Chinese stocks doesn’t derail the long-term investment case in China, according to Dzmitry Lipski, head of funds research for interactive investor.
The emerging middle class which drove economic growth in China and helped shift it from an export focused to domestic consumption economy is still a major theme, Lipski said.
“The growth potential that this shift offers is considerable,” he added, though it won’t be without volatility.
Darius McDermott, FundCalibre managing director, said Chinese equities are “not for the faint hearted”. But he added that China’s market was still has huge opportunities for investors, particularly as the A-share market opens and more overseas investors enter it.
Because of the volatility and more risky nature of the sector commentators said that all three of the IT China/Greater China investment trusts were more suited to more ‘adventurous’ investors. But within that all three trusts can offer something different.
Source: FE Analytics and AIC
Baillie Gifford China Growth
Baillie Gifford took over this investment trust in September 2020, rebranding it from the Witan Pacific Investment Trust.
Under the previous managers the trust took a multi-asset approach investing across the Asia Pacific region, including markets such as Japan, Australia and India.
Coming under Baillie Gifford’s management, it was revamped into the asset manager’s style of a concentrated portfolio of ‘exceptional outliers’ focused on quality-growth stocks.
Investors responded positively, pushing the trust from a discount to a premium. One year ago it was running on a 3.12% discount, now it is on a 1.02% premium. It is currently the only trust in the IT China/Greater China sector on a premium.
The trust now invests purely in China with the ability to hold up to 20% in private companies. These characteristics puts the trust at the “top end of the risk scale,” McDermott said.
But the concentrated nature of the trust, both in the number of holdings and one region allocation, combined with Baillie Gifford’s growth approach means this is “a high-octane trust for very adventurous investors”, said Laith Khalaf, AJ Bell analyst.
Baillie Gifford’s well-known growth-oriented and tech-biased approach means that this trust was one of the more susceptible to the recent volatility among Chinese tech stocks. A quarter of the trust’s portfolio is in the tech sector. But this doesn’t undo the investment case for the trust, said Ewan Lovett-Turner, head of investment companies research at Numis Securities.
Lovett-Turner said Baillie Gifford has typically been willing to ride-out periods of market volatility, focusing on the long-term growth investment case, or using them as buying opportunities. These are outcomes they’re expecting here.
Since FE fundinfo Alpha Managers Roderick Snell and Sophie Earnshaw took over Baillie Gifford China Growth, it has made a total return of 14.5%, besting both the IT China/Greater China average and the MSCI AC Asia Pacific benchmark.
Performance of fund vs sector and index under new managers
Source: FE Analytics
The £272.6m trust has ongoing charges of 0.78%, a 1.64% dividend yield and 1% gearing.
Fidelity China Special Situations
Fidelity China Special Situations is next and is the preferred option for Numis’ Lovett-Turner.
Manager Dale Nicholls runs a more balanced approach, according to Lovett-Turner, making full use of the investment trust structure through active use of gearing and access to unquoted assets.
Plus the manager has a “strong long-term track record”, he added.
Under Nichols’ seven-year tenure, the trust has beaten both the sector and MSCI China benchmark, returning 289.2% versus 250.6% and 125.3% respectively.
This trust is suited to adventurous investors who want a “decent chunk of exposure” to Chinese small-caps, Khalaf said.
The manager looks for cash generative companies that have been ‘misunderstood’ by the market, reflected in cheaper and attractive valuations.
This puts the trust’s investment pool generally in small-caps, though it does have some large-cap exposure. It can also invest in private companies, similar to Baillie Gifford China Growth, McDermott said, but with greater diversity as it invests across over 100 stocks.
The £1.9bn trust has made a total return of 362% over 10 years, more than the sector and benchmark.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It is running on a 0.29% discount with 33% gearing and a 1.28% dividend yield. It has ongoing charges of 0.97%.
JP Morgan China Growth and Income
Finally is the JPMorgan China Growth and Income trust. Unlike the others, it has a mid- and large-cap focus with around 87% of the portfolio invested in these parts of the market.
This large-cap focus mitigates some of the risk from investing in the Chinese market generally, Khalaf said.
Although it’s also invested in quality-growth stocks, it’s different to Baillie Gifford’s top-end growth exposure, McDermott said.
Primarily the trust is suited to income investors, especially for more adventurous investors who already have a well diversified income portfolio in developed markets and are “looking to add a little spice,” Khalaf said. The trust aims to provide a 4% yield and is currently on 3.9%.
Launched in 1993 it has made a total return of 357.1% since 2011, beating both the IT China/Greater China sector and MSCI China benchmark.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It is currently on a 5.55% discount, running 10% gearing and has ongoing charges of 1.01%