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Five funds that offer solid exposure to China

Despite China boasting the world’s second largest economy and consistently impressive GDP growth rates, even post covid, many investors still choose to overlook China as an allocation in portfolios, opting either to ignore the country altogether or allocate through a broader emerging market mandate, with Gem still holding 65%+ of market share of developing market investment.

We feel that there is an opportunity to be had and it seems highly likely China will feature more and more in portfolios, a trend that has been growing in recent times with 2020 seeing Chinese equity funds having 10 times the flows of Gem funds, writes Ruli Viljoen, head of manager selection, manager selection services at Morningstar.

Here are five funds that we feel are well placed to deliver over the long term and provide investors with solid exposure to China.

FSSA (First State) Greater China Growth

A time-tested approach applied by an excellent manager makes this a standout choice for Chinese exposure and has served long term holders well. It holds our highest accolade of a Morningstar Analyst Rating of Gold.

Martin Lau has managed the strategy since its inception in the early 2000s and his 20-strong team has applied the process diligently since.

Lau seeks to create a portfolio of high-quality names and avoid the pitfalls of less mature markets by looking for management teams that act with integrity, have high governance standards, have a demonstrable track record of allocating capital effectively, and are well-aligned with minority shareholders.

Schroder ISF Greater China

Managed by the highly regarded Louisa Lo since 2002, the fund has delivered excellent returns for investors and with a strong team backing her and a robust investment framework, we have confidence she will continue to deliver and, as such, this fund also gains our highest Morningstar Analyst Rating of Gold.

Lo employs a quality growth focused investment process that has been consistently applied and proven over multiple market cycles across a range of Schroders’ Asian equity products.

It benefits from a robust and clearly defined framework, where analysts assess a company’s growth prospects by comparing its return on invested capital and weighted average cost of capital.

JPMorgan China Growth & Income (JPMorgan Greater China)

The only investment trust on the list, this trust was repurposed in 2020 to target a 4% dividend yield each year, paid quarterly.

Despite this change, the time-tested process of investing in secular growth companies picked by veteran manager Howard Wang has endured and the trust holds a Morningstar Analyst Rating of Silver.

Investors should note that the trust currently has around a 5% premium having average an 11% discount over the last five years, and open-ended variations of the team and process are available as JPM China and JPM Greater China

Howard Wang has led the strategy since 2005 and been investing in China since 1995, applying his core process for the whole length of time, with a tilt to secular growth since 2015.

The enhanced bottom-up investment process focuses on companies with long-term growth potential, characterised by strong earnings and cash-flow growth, improving industry structure, and robust business models.

Numbers on the open-ended vehicle are excellent and on the trust are stellar, and while there can be years, such as 2018, when the trust props up tables, when it delivers, which is more often than not, it finds itself as one of the top performers in the universe.

UBS China Opportunities

One thing we think is key in China is the experience of the manager and seeing the process work over time and the UBS China Opportunities fund certainly offers that, with Bin Shi having over 25 years in the market and also consistently showing he can identify winners in their early stages and also pull off astute tactical cash calls during market extremes.

The cheapest share classes of the strategy earn a Morningstar Analyst Rating of Gold with the clean share class rated Silver.

Shi focuses on identifying long-term winners in industries that he believes would benefit from China’s structural growth trend. His approach is benchmark-unconstrained, and the portfolio has been concentrated on a few key growth sectors such as consumers, healthcare, and insurance.

Strategy performance has been remarkable, with the fund ranking in the top decile over the 2010s and beating the index by a substantial margin.

Fidelity China Focus

While the funds we have highlighted so far have been leaning towards growth and/or quality as styles, the final fund on the list is one with a value tilt and may be of interest to those investors that think valuations and momentum have run too far or that value will return to former glories post covid.

Ruli Viljoen

The strategy is run by Jing Ning who carries 21 years of experience and has applied this valuation driven benchmark aware process.

It holds a Morningstar Analyst Rating of Silver.

Despite the strategy lagging badly in the high growth markets of 2017 and 2019-20, Ning has stuck to her guns and kept the portfolio invested in beaten up value names.

She focuses on finding out-of-favour names that are trading below their intrinsic value and have turnaround potential.

This article was written for Expert Investor by Ruli Viljoen, head of manager selection, manager selection services at Morningstar.

Part of the Bonhill Group.