As emerging market economies have grown and a wealthier middle class forms and expands, fund managers have been quick to point to a tilt away from exporters towards companies serving this demographics’ huge desire for goods and services.
The likes of the Diageo, Unilever, Mulberry and Burberry have a colossal re-rating of their respective share prices over the past 10 years, in no small part thanks to their large and widening operations in emerging markets.
Mulberry is up 1,352.35 per cent and Burberry 412.26 per cent, while Diageo and Unilever are up 265.4 and 245.21 per cent, respectively.
Performance of stocks and index over 10yrs
Source: FE Analytics
Many point to these developed market companies as the best way of getting exposure to emerging markets, giving investors the best of both worlds: high levels of growth and good corporate government. Managers such as FE Alpha Manager Nick Train and Liontrust’s Jan Luthman have had a great deal of success investing in this way.
However, Ma says this method of investing could come under pressure from domestic companies, which are beginning to erode the market share of multinationals.
“The impact of Chinese growth in lots of these companies versus their overall growth will come down over the next five or 10 years, but it will be a gradual process,” he said.
“For a lot of Chinese people buying these goods is about showing off. As some people have become successful they have liked to show off their success.”
However, he says as the brands have become more ubiquitous across China a younger generation is less materialistic in contrast to the older generation –and prefers products that are “cool rather than just luxurious.”
With this in mind we look at two funds and one trust that play into the consumer growth story but hold few multinational names listed in the West.
Fidelity China Consumer
Ma’s £15m Fidelity China Consumer fund is a mirror of his FCA offshore-domiciled $2bn Fidelity China Consumer fund.
As its name suggests, the fund only invests in stocks that are directly or indirectly associated with the growth of the Chinese consumer. Ma was one of the first investment experts to champion this theme back in the early 2000s.
Since the fund’s launch three years ago it is the fourth best-performing fund in the IMA China/Greater China sector, returning 40.1 per cent compared to the sector’s 26.42 per cent and the MSCI China’s 30.25 per cent.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
Fidelity China Consumer beat the average fund in the sector in 2013 and 2012, which were both difficult years for Chinese markets. The companies Ma invests in tend to hold up better during more difficult periods but lag when markets rally – as has been the case in recent months.
Top holdings include media and internet conglomerate Tencent, Macau casino group Sands China and state telecoms company China Mobile.
The fund has an ongoing charges figure [OCF] of 1.3 per cent.
Matthews Asia Pacific Tiger
Matthews Asia is relatively unknown in the UK, but is highly respected in the States. The group is growing in reputation on this side of the pond however, with the $330m Asia Pacific Tiger portfolio recently being recommended by Richard Romer Lee and his team at Square Mile.
Headed up by Richard H Gao and Sharat Shroff, the fund has been a top quartile performer in the IMA Asia Pacific ex Japan sector since its launch in February 2011 with returns of 33.1 per cent, beating its benchmark – the MSCI AC Asia ex Japan index – by more than 12 percentage points.
Performance of fund, sector and index since launch
Source: FE Analytics
Square Mile Research says investors should not be deterred by the relatively short track record and smaller size of the fund compared to likes of Aberdeen and First State. They highlight it as a good play for investors wanting exposure to the consumer growth story in emerging Asia.
“The nature of the house style results in a portfolio that has a preference for more growth orientated stocks that are held for the long term. The emphasis on companies benefiting from growing consumer demand means the manager tends to avoid most of the index's largest names when constructing the portfolio,” Square Mile said.
“In turn, this leads to a bias towards midcap names and means that the fund's resulting sector weightings can be very different from the benchmark. That said, the overarching focus on quality means that performance should be more resilient during market downturns.”
Top positions in the fund include Ping An Insurance, Tata and Baidu.
The fund has an OCF of 2 per cent.
JP Morgan Chinese IT
This £161m investment trust is a possible bargain play for investors wanting exposure to Chinese consumer names. Its discount has widened in recent years to 11 per cent.
Performance has been solid in spite of this however, with share price returns of 34.28 per cent compared to a gain in the MSCI China index of 30.42 per cent.
Performance of trust, sector and index over 3yrs
Source: FE Analytics
The trust has beaten the index in every full calendar year over the past five years apart from 2011 and done so with less volatility than the much higher profile Fidelity China Special Situations IT, formerly managed by industry legend Anthony Bolton.
JP Morgan Chinese’s largest holdings include Tencent, Taiwan Semiconductors and AIA Group but its largest sector bet is on financials with holdings such as the China Construction Bank, Agricultural Bank of China, China Minsheng Bank and Ping An Insurance all in the top-10.
In total financials make up 36 per cent of the portfolio with telecoms, media & tech – a more obvious play on the Chinese consumer – its next largest sector exposure.
The trust has four listed managers in Howard Wang, Emerson Yip, Shuman Huang and William Tong. It is 8 per cent geared and has an OCF of 1.31 per cent, not including performance fee.
