Posted inChina

One China fund delivers as markets collapse

The Chinese equity market has become the most resilient among the major stock markets this year as global markets tumble due to the panic caused by the coronavirus pandemic.

Year-to-date, the MSCI China returned -14.03%, which compares to the -25.45% performance of the S&P 500 and the -31.64% of the MSCI Europe Index, according to data from FE Fundinfo.

Index 2020 YTD
MSCI China -14.03
MSCI AC Asia -22.36
MSCI ACWI -24.64
S&P 500 -25.45
MSCI Emerging Markets -25.68
MSCI Europe -31.64
Source: FE Fundinfo

Active fund managers often say that difficult market conditions provide them with stock-picking opportunities.

But only a few are successful.

Out of the 44 Greater China funds sold in Hong Kong, only 17 (or 38%) of them have outperformed the MSCI China Index this year, FE Fundinfo data shows.

The current figure is even lower compared with previous years, where at least half of the funds produced better returns than the index during the full-year 2019 and 2018.

But out of those Greater China funds that have outperformed so far this year, only one stood out as it produced positive returns.

Managed by Fullgoal Asset Management in Hong Kong, the China Small-Mid Cap Growth Fund performed 0.17% this year.

Fullgoal AM is a wholly-owned subsidiary of Shanghai-based Fullgoal Fund Management, which was established in 1999.

The firm also has a cross-border asset management venture with Canada’s BMO, which holds a 28% stake.

Excluding money market funds, Fullgoal is the ninth largest fund manager in China with RMB214bn (€27.8bn) in assets, according to data from Morningstar Direct.

Five best-performing Greater China funds (YTD %)

Fund 2020 YTD 2019 2019 Rank
Fullgoal China Small-Mid Cap Growth in US 0.17 40.43 4
CUAM China Hong Kong Strategy in US -8.71 27.09 15
BOCOM International Dragon Core Growth in US -9.07 11.44 43
i Capital China in US -9.28 16.56 38
BNP Paribas China Equity in US -10.34 35.02 6
Source: FE Fundinfo. In US dollars.

Fullgoal fund

Incepted in 2016, the Fullgoal China Small-Mid Cap Growth Fund was only made available to retail investors in Hong Kong in July.

Since then, assets have more than doubled to $29.96m as of the end of January, according to its fund factsheet.

The product is also the first and only retail offering the firm has in Hong Kong. Its other strategies, which are the Fullgoal China Opportunities Fund and the Fullgoal China Islamic Equity SP, continue to be only available to professional investors, according to the firm’s website.

The Small-Mid Cap Growth Fund is co-managed by Zhang Feng, who is also the chief investment manager of the firm, and portfolio manager Ning Jun.

Given the small- to mid-cap mandate of the fund, widely-held large-cap names such as Alibaba, Tencent and PingAn do not appear in its top 10 holdings.

The Fullgoal China Small-Mid Cap Growth Fund

Source: Fund factsheet

Top 10 holdings of the remaining top four products

CUAM China – Hong Kong Strategy Bocom International Strategy
Alibaba (9.5%) Tencent (7.93%)
Kweichow Moutai (9.2%) Ping An Insurance (7.67%)
Tencent (8.8%) Cansino Biologics (7.07%)
Cansino Biologics (8.6%) China Merchants Bank (7.01%)
China Merchants Bank (6.8%) AIA Group (5.42%)
iCapital China Fund BNP Paribas China Equity
Shanghai International Airport (11.09%) Alibaba (9.50%)
Anhui Conch Cement (10.59%) Tencent (9.47%)
Zhengzhou Yutong Bus (9.28%) Netease ADR (5.32%)
China Sunrise Chemical (7.62%) Ping An Insurance (3.78%)
Hangzhou Robam Appliances (7.43%) Tal Education Group (3.68%)
Source: Fund factsheets

In addition, the Fullgoal fund is concentrated, with the top 10 holdings accounting for nearly half of the portfolio. Having a more concentrated portfolio has become a common characteristic among the best-performing Greater China funds on a three-year annualised basis.

Change in mandate

A Hong Kong-based spokeswoman of the firm noted that the fund had a change in its investment mandate. Effective 27 January, the fund can invest 50% of the portfolio into China A-shares, up from the previous 30% cap.

She explained that the fund is taking a long-term view that the A-share market will provide increasing investment opportunity in the coming years.

“If our fund grows substantially in the long-run, we would need to increase positions in A-shares.”

However, she noted that the change in mandate has not made any changes in the strategy. Despite the increase in the investment limit, China A-shares now account for 13% of the portfolio from 17% before the mandate was implemented.

“We think H-shares have better risk-adjusted reward now,” she said.

The fund managers prefer quality growth stocks that have stable earnings growth with cheap or fair valuations, according to the spokeswoman. In terms of investment opportunities, the fund managers prefer companies that fall under secular themes, including consumer and technology.

Source: Fund factsheet. As of 31 January 2020.

The secular growth theme is popular among fund managers investing in China and the whole of Asia, which include BNP Paribas Asset ManagementJP Morgan AMAxa Investment Managers and Blackrock.

The Fullgoal China Small-Mid Cap Growth Fund versus the MSCI China Index

Source: FE Fundinfo. In US dollars. Note: the fund’s benchmark index, the MSCI China Free SMID Index yield (95%) + HK overnight interbank offer rate (5%), is not available on FE Fundinfo.

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Francis Nikolai Acosta

Francis is editor for Fund Selector Asia, covering the asset and wealth management industry in Asia. He joined Last Word Media in November 2016. Previously, he was a reporter at Ignites Asia, A Financial...

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