GUINNESS BEST OF CHINA FUND: A scary time, but you can still invest in China for the long term
Times are tough for investors with exposure to Chinese equities. The country’s stock markets have been hit hard by the regime’s rigid approach to Covid, leading to lockdowns, protests and policing. There is also the overhanging issue of Taiwan’s and China’s intentions.
As a result, some China-specialized mutual funds have seen the value of their shares shrink by more than 20 percent over the past year and there are few signs of any improvement – at least in the near term.
Investment fund Guinness Best of China also struggled with its portfolio over the past year, though the 15 percent drop is less than the average for Chinese funds of 22 percent. This is mainly because the fund, an £8.5 million minnow, doesn’t have the big holdings in tech stocks like Tencent and Alibaba that competing funds have. These companies saw their share prices fall by 36 and 29 percent respectively over the past year.
Like many funds managed by Guinness Global Investors, the Best of China fund manages a portfolio of about 30 stocks with equal weights (just over 3 percent) in each stock. It means that no holdings dominate the portfolio – and no investment theme overwhelms. While individual holdings are allowed to rise to 6 percent — and fall to as little as 2 percent — the managers rebalance the fund each quarter, meaning gains are crystallized on strong-performing positions while buying more shares in companies whose stock prices are low. state .
The fund is jointly managed by Sharukh Malik and Edmund Harriss. While Malik says long-term investment in China remains strong as the country’s manufacturing base becomes increasingly “sophisticated,” he accepts that being an investor is “scary” in the short term.
As for the lockdowns, Malik is confident the economy should open up more next summer as domestically-made vaccines roll out, more boosters are given and death rates fall. Regarding a possible conflict with Taiwan, Malik admits that this is a problem on the mind of all fund managers who manage Chinese portfolios. “We have to keep an eye on it,” he says.
The fund’s focus is on discovering companies with the potential for strong long-term earnings growth. It means a Chinese equity universe of 9,500 is reduced to 680 – with 31 stocks coming into the portfolio. Apart from the Taiwanese holdings, these companies are either listed on Chinese stock exchanges or in Hong Kong.
Malik, proficient in Mandarin, says the fund explores a number of strong investment themes. This includes sustainability (for example, the need for more solar energy); the growth of financial services thanks to a growing middle class; and the electrification of motor vehicles.
All are reflected in the portfolio through respective holdings in Hangzhou First Applied (solar film specialist); Ping An (insurance); and Shenzhen Inovance Technology (automotive robotics specialists).
Recent portfolio changes include new holdings in Hangzhou First Applied and the sale of holdings in China Lesso Holdings (exposed to the domestic real estate market) and China Lilang (a clothing retailer overly dependent on the high street). The annual cost of the fund is 0.89 percent.
While all Chinese funds have struggled recently, some have a decent five-year record. For example, FSSA All China and FSSA Greater China Growth have achieved returns of 48 and 38 percent, respectively. Over the same period, Guinness Best of China recorded a small loss of 0.3 percent.