Darius McDermott: Fund picks for China

The experienced hand – FSSA Greater China Growth

This fund has been a firm favourite of ours for a number of years. Veteran fund manager Martin Lau has run this fund since 2003, and his track record shows that his team can consistently produce returns in any type of environment. For example, for all the challenges China faced in 2021, this fund still produced a 5% return for investors, according to FE fundinfo. The fund invests in quality companies with barriers to entry, pricing power and sustainable growth. Governance is very important, although Lau is willing to invest in state-owned enterprises where governance is shown to be improving. The 50-60 stock portfolio also has a strict valuation discipline.

Untapped growth and a true diversifier – Allianz China A-Shares

The Chinese A-share market is very large and very inefficient, providing great opportunities for active funds like this one, which has been operating in this market for much longer than most of its competitors.

We like the ‘Grassroots’ research which gives managers Anthony Wong and Kevin You an extra edge in the region. Then there is the genuine diversification the fund offers, with China A-shares having only a 0.32 correlation with global equities in the last ten years. This means that A-shares move in a different direction to global equities almost 70% of the time, by comparison US equites have a 0.97 per cent correlation, according to a presenation from the fund mangers in February.

The IT route for small and mid-caps – Fidelity China Special Situations

Although there are major opportunities – particularly given valuations at this point – the past 18 months have shown Chinese equities are not for the faint hearted. This is why the closed-ended structure of an investment trust looks attractive.

One we like here is the Fidelity China Special Situations trust, managed by Dale Nicholls. Making use of the closed-ended nature of an investment trust, Nicholls can invest up to 15% of the portfolio in unlisted companies, taking advantage of their early stage growth before they become listed on the public markets.

The portfolio does have a bias towards smaller and medium-sized companies, which means investors must prepare for fluctuations in returns. This risk is somewhat mitigated by a well-diversified portfolio of 120-160 holdings. Since Dale took on the portfolio in 2014, the trust has returned 161.8% to investors, according to FE fundinfo

Income potential – JP Morgan China Growth and Income

By contrast to Fidelity, this trust has more of a large-cap focus, with 70% of the portfolio currently sitting in companies with a market cap in excess of $10bn, according to the factsheet.

The trust is a high conviction portfolio of 60-80 stocks with a focus on higher quality companies. The managers are fundamental, bottom-up stock pickers with the strength of the research team allowing them to actively cover an investment universe of 590 Greater China stocks, including 270 A-Shares. We also like the additional income focus, which allows the trust to stand out from its peers. The trust has returned 242.6% in the past decade.

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