She claims that the turbulence created in the stockmarket following rafts of weak data for China has differentiated the performance of stocks – separating those with the potential for continued growth and those that could be “one-hit wonders”.
Ms Chan explains: “I’m not negative on the data that has come out because the policymakers have been talking about engineering a slowdown in the economy, so actually they have delivered what they said.
“People investing in China are not used to the authorities not reacting to a growth slowdown, and market participants dislike uncertainty, so that is what has generated the stockmarket turbulence.”
She adds: “One feature of investing in China is that while the growth is there, the competition comes in very quickly and a company that doesn’t have a sustainable business model could be a winner today, but not in the longer term – kind of like a one-hit wonder.”
The fund, launched in March 2007, invests at least two-thirds of its assets in Chinese-listed companies, or businesses with significant operations in the emerging market.
PROCESS
The manager, who has been at the helm of the fund since its inception, does this by focusing on three features among her investable universe of stocks – good management, brand franchise and cash generation.
Ms Chan says: “It is crucial that the companies can deliver growth on a sustainable basis. You hear about tightening cycles in China; I think that one key differentiator for companies that succeed in China is their ability to generate their own cashflows to reinvest in their future growth.
“I’ll tend to have quite long-term view on stocks because of the structural changes that are taking place. Some of the stocks in the portfolio I’ve held since launch.”
One such stock is ENN Energy, a gas distributor that Ms Chan has held since the fund launched and now makes up 2.8 per cent of the fund.
“It fits into the ‘superior management qualities’ when compared with peers. In an industry that has seen a lot of consolidation through the years, it has grown faster than any other. I look for companies that can exceed GDP growth.”
The largest holding in the fund, at 7 per cent, is Tencent Holdings – a media company that runs QQ.com, one of the largest web portals in China. For Ms Chan, this plays heavily with the ‘consumption’ theme running through the portfolio.
“Chinese GDP growth is very much being driven by investment, and part of this transition process is that consumption is going to be the lead in terms of GDP growth,” she says.
PERFORMANCE
Since launch the fund has delivered a 78.09 per cent return, compared with an MSCI China index return of 70.04 per cent.
Based on five-year performance figures, the fund has slightly lagged its wider IMA China/Greater China peer group average, underperforming by a mere 0.82 percentage points, according to FE Analytics. This is likely to be a result of the negative economic news coming out of the region.
However, Ms Chan explains: “The economy will slow as reforms go on, but the slowdown isn’t going to be lethal for good quality companies. Even the bearish forecasts have GDP growth at 5-6 per cent, which is still reasonable, and given that backdrop good companies will still deliver earnings growth.
“When things go wrong they tend to be smaller positions because I reduce the exposure based on the conviction in the company itself.”
EXPERT VIEW
Ben Willis, investment manager and head of research, Whitechurch Securities:
Verdict
“The fund has been running since 2007 and has outperformed the sector but with greater volatility. This could be attributed to the fund’s exposure to the mainland A-shares rather than restricting itself to Hong Kong-listed shares. As such, the fund has had significant drawdown periods, but has generally outperformed when Chinese markets are rising. If you believe that China currently looks good value and can stomach the volatility, this could be the fund for you.”
