The manager of the £212.7m fund, explains: “On price-to-earnings (p/e) terms, the MSCI China index is now trading at 8.3 times 2013 p/e, versus its 20-year historical average of 12.4 times. The region is equally supportive as measured by price to book (p/b) metrics, at 1.3 times trailing p/b versus a 20-year average of 1.8 times.”
Mr Shiao has been at the helm of the Invesco Perpetual Hong Kong & China fund alongside co-manager Lorraine Kuo since June 2012, following the departure of Samantha Ho.
By taking advantage of market inefficiencies through investments in companies exposed to Greater China, the managers offer investors capital growth over the long term.
Process:
The managers invest on a bottom-up basis, selecting stocks that fit in with their four “core beliefs” – company fundamentals, competitive advantage, under-researched stocks and long-term investment horizon.
Mr Shiao adds: “We generally prefer low gearing (lower debt) companies, and also [those that put] emphasis on dividend payouts, as those companies with high dividend payouts tend to demonstrate better management in balance sheet and cashflow terms.
“Companies we select for portfolios also share a number of qualitative features – superior business models, competitive products or services, solid corporate governance with clear ownership structures, and transparency.
“We also believe that a company’s awareness of environmental and social issue matters is important, as these elements will be critical in China’s investment environment in the coming years.”
The portfolio is relatively concentrated, holding roughly 50 stocks, and recent market volatility has not led the managers to change their investment philosophy.
“The portfolio continues to be focused on domestic consumer sectors that are poised to benefit from secular growth trends, with consumer discretionary and staples sectors making up roughly one-third of the portfolio,” says Mr Shiao.
The manager admits the Chinese equity market has evolved considerably in the past five years, with the composition of the China index shifting away from state-owned enterprises.
He adds: “Sectors predominantly composed of state-owned enterprises, including energy, industrials, materials and telecommunications, have reduced from 59 per cent of the MSCI China 10/40 weight, to 36 per cent in the past five years.
“In contrast, the period has witnessed a rapid emergence of consumer-related and IT companies, mainly via public offerings. Consumer discretionary, consumer staples and IT sectors now make up 19 per cent of the index, up from 8 per cent five years ago.”
Performance:
In five years, the fund has outperformed the IMA China/Greater China sector average by 17.2 percentage points and since the current managers took over the fund on June 1 2012, the fund has more than doubled that of the peer-group average.
From June 1 2012 to July 17 2013, the fund has returned 31.51 per cent, compared with just 15.55 per cent from the IMA China/Greater China sector.
“Our conviction in high-quality consumer companies has been the biggest contributor to relative performance in recent years, and has delivered added value during both up and down markets,” Mr Shiao explains.
However, he admits that overall market conditions have been challenging in recent weeks. “We are aware that market volatility may lead to temporary underperformance but we are prepared to be patient with our convictions,” he says.
For those with a positive view on the long-term investment story in China, this fund would be a good choice for a well-diversified portfolio.
EXPERT VIEW
Ben Willis, investment manager and head of research, Whitechurch Securities:
Verdict
“This is an established fund that has been open since 1981. The fund has delivered good relative returns compared with the sector, both in the short term and long term. Performance in the past year has been particularly strong given the management team’s long-term focus on the Chinese consumer and big underweight in the financials sector. A solid choice for those currently looking to time their entry into China.”
