Despite more recent concerns about a trade conflict with the US and slowing growth, China has continued to grow over the past decade to become one of the world’s biggest and often most-misunderstood economies.
While there have been some challenges to the Chinese economy in recent years, it has continued to grow at a higher rate than its financial crisis-hamstrung Western peers over the past decade. And while the economy has been growing, so too has the domestic market as Chinese companies reap the benefits of solid economic growth.
During the 2010s, the MSCI China outpaced the broad MSCI Emerging Markets index with a return of 68.26 per cent – in US dollar terms – around 15 percentage points more than the broader index.
Although performance lagged the US markets – its biggest geopolitical and economic rival – there have been some signs of interest among investors keen to access one of the fastest-growing, large economies.
Greater representation of China in emerging market benchmarks means that many investors are likely to have a higher weighting to the country in the future.
And some early investors in China are starting to see some benefits.
Investors in the average IA China/Greater China fund during the 2010s would have made 105.25 per cent, according to data from FE Analytics (although just 22 of the sector’s funds have a long-enough track record to qualify for this study).
The best performer of the decade was the First State Greater China Growth fund, which made a total return of 209.40 per cent compared with a gain of 133.71 per cent for its MSCI Golden Dragon benchmark, a mid- and large-cap index of stocks listed in China, Hong Kong and Taiwan.
Performance of fund vs sector & benchmark during 2010s
Source: FE Analytics
The £535.1m, four FE fundinfo Crown-rated fund was launched in December 2003 and has been overseen by Alpha Manager and veteran investor Martin Lau during that time. He was joined on the fund more recently by Helen Chen.
Lau is a veteran investor in the space and oversees a concentrated and high conviction portfolio of 55-60 stocks, with an emphasis on high-quality growth companies – a style that has been in favour for much of the past decade.
Top holdings in the portfolio currently include Taiwan Semiconductor Manufacturing Company (7.8 per cent), Tencent (6 per cent), insurer AIA Group (4.7 per cent) and China Merchants Bank (4.5 per cent).
Analysts at Square Mile Investment Consulting & Research suggest it is this focus on quality that has made First State Greater China Growth more resilient in down markets. It has a top quartile annualised maximum drawdown figure – the most a fund would have lost if bought and sold at the worst possible times – of 25.91 per cent, compared with an average loss of 32.51 per cent for the peer group.
However, there was a wide gap between the best and worst performer in the sector with 161.45 percentage points separating the two.
The worst performer in the sector was Jupiter China, which returned just 47.95 per cent over the decade.
Jupiter China was launched in October 2006 and has been managed by Ross Teverson – head of strategy, emerging markets at Jupiter – since January 2015. He took over the fund from Philip Ehrmann and Kathryn Langridge, who departed the asset manager at the end of 2014 to join Manulife Asset Management.
Performance of fund vs sector & benchmark in 2010s
Source: FE Analytics
In the latter five years of the decade when Teverson took charge of the fund, it has made a total return of 33.12 per cent compared with a gain of 68.91 per cent for the MSCI China benchmark and a 70.16 per cent return for the peer group average.
The fund aims to provide a total return higher than that provided by the MSCI China index over the long-term, in this case at least five years.
Manager Teverson focuses on companies that are “undergoing some form of positive change” where that potential has not been so far reflected in the share price. This approach, Teverson believes, “is the best lens through which to identify businesses with the ability thrive in China’s rapidly changing economy”.
However, it’s been a challenging decade for such a value approach as cheap money has flooded the market and found its way into quality-growth stocks.
As the below chart shows, during the 2010s the MSCI China Growth index has significantly outperformed its value counterpart, making a 132.82 per cent – in sterling terms – while the MSCI China Value index has risen 75.32 per cent.
Performance of indices during the 2010s
Source: FE Analytics
According to Jupiter, the fact that Teverson – who is supported by Charles Sunnucks – focuses on underappreciated growth opportunities means that as well as large and established businesses it will also invest small- and medium-sized business.
This can be seen in the portfolio, where – currently – just over half of the portfolio (59.9 per cent) is invested in large-cap names, while 31.9 per cent is held in small caps and the remainder in mid-cap stocks.
In addition, Teverson’s belief the China is transitioning towards a higher consumption means there are several consumer-focused companies among its top-10 holdings, such as online retailers JD.com and Alibaba, and internet companies Baidu and Tencent.
Nevertheless, there were some strong performances to be found in the sector, as the below table shows, with 13 strategies making a total return of more than 100 per cent during the 2010s.
Source: FE Analytics
Other notable performances came from the Allianz China A-Shares (up by 175.48 per cent) and Schroder ISF Greater China (160.38 per cent) and Invesco China Equity (159.74 per cent), with more growth-focused strategies found at the top of the table.