Roughly one third of the Chinese equity portfolio Diamond Lee inherited just two months ago has been dumped by the manager in a bid to mould it into shape.
Old Mutual Global Investors (OMGI) hired Mr Lee in November 2014 and he was handed the $95.8m (£64.5m) Greater China Equity fund on January 20 this year when the company decided to bring the product in-house.
The portfolio had been run on a sub-advised basis since 2012 by Australian firm Metisq Capital.
Mr Lee swiftly revamped the fund and he told Investment Adviser it was “cleaned up and ready to go”.
One of the manager’s main goals in the overhaul was to reduce the number of stocks. The fund had about 65 holdings when he took control but it has now been cut to 41 stocks.
However, he has kept a large portion of the portfolio in Chinese banks, an area in which he is eyeing further opportunities.
Mr Lee was consistently underweight Chinese banks when he managed Asian and Chinese equity funds at his former company Ignis Asset Management. But he now has a slight overweight and he plans to add more.
Financials was the largest chunk of his portfolio and made up 39.1 per cent at the end of February, the fund’s factsheet showed. This was just a slight overweight compared with the benchmark MSCI Golden Dragon index, which had 38.9 per cent in financials.
Mr Lee said the environment for Chinese banks was improving and their balance sheets were getting stronger, but he thought the stockmarket appeared to have a negative view on the sector.
He added that worries about bad loans meant many of the banks were trading at book value – the value of a bank’s assets less its liabilities. But with returns in the high teens during the past month, he thought the banks were worth the risk.
Mr Lee is also bullish on Chinese property, a sector he is 10 percentage points overweight.
Several managers have raised concerns about the country’s property sector, in part because of the recent declines in the rate of real estate investment and the lower number of commercial buildings sold in January and February.
“[But] it is not as simple as these numbers,” he said.
The manager added that the Chinese property sector was “severely fragmented”, and that the top-10 companies had just 24 per cent of the market share.
Mr Lee said the strong players were beginning to pull away and would offer an investment opportunity as they could take over some of their smaller rivals, which would not be able to survive amid the slower economic growth in China.
He holds Vanke, the largest real estate developer in China, which has a market share of just 4 per cent. The manager thought the company’s market share “could easily double”, and he held 6 per cent of the stock in his portfolio at the end of March.
He also held China Resources Land and China Overseas Land and Investment.
Mr Lee said he generally preferred China to Hong Kong and Taiwan and had a large underweight to those countries.
He held 23.6 per cent in Hong Kong and 18 per cent in Taiwan respectively at the end of February, the factsheet showed.
Meanwhile, the index has 71.7 per cent in Hong Kong and 28.1 per cent in Taiwan, with just 0.21 per cent in China.
“Hong Kong and Taiwan are more developed and are in a steady state, while China is still growing,” Mr Lee said.
Investors wary of slowing growth in China
Disappointing data from China is raising concerns from investors about slowing growth, which Old Mutual’s Diamond Lee admits is the biggest threat for the country.
Data from the National Bureau of Statistics showed Chinese retail sales in January and February – China’s data combines the first two months of the year – grew by 10.7 per cent.
This figure is well below expectations of a rise of 11.6 per cent and the 11.9 per cent growth seen in December.
Mr Lee, who runs the Old Mutual Greater China Equity fund, noted that a hard landing – a severe fall in economic growth – remained the greatest fear for the country.
However, he thought investors had failed to take into account how far the government was willing to go.
He said: “If things get really bad, quantitative easing could be used. I don’t mean this year, but there is fiscal policy to stave off deflation if things get really bad.”
