7IM struggles with China fund search

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7IM struggles with China fund search

Seven Investment Management (7IM) chief investment officer Chris Darbyshire is on the hunt for active funds offering exposure to “new China”, but worries some managers lack an “edge” in the region.

Mr Darbyshire said the lack of growth sectors, such as services, in China-related indices had prompted the firm’s team to seek good active managers to provide exposure in 7IM’s multi-manager range.

But this search has proved difficult, with Mr Darbyshire’s team unimpressed by some China-focused managers.

He said: “The problem with China is half the economy is really slow, but areas such as technology are going gangbusters.

“The indices are old world and not tracking the services sector, for example. I think China managers are the only way to solve that problem, if people feel confident to invest.”

He notes the Hong Kong stock exchange is made up of “65 to 70 per cent banks” and lacks consumer-facing growth stories such as Alibaba, Tencent and Baidu. “You get no exposure to the ‘new China’,” he added.

While Mr Darbyshire is keen to add alpha in China, he is worried some managers lack competitive advantage in the region.

He said: “My team has met British and American [managers] who don’t speak the language and are reliant on interpreters. If they don’t speak the language, where is their edge?”

Elsewhere, Mr Darbyshire is seeking active managers for a broader shift towards value. But he said it was difficult to find many in this area, with the style having been out of favour for so long. To reflect this swing, the four-strong range added the Artemis European Growth and Henderson European Focus funds.

“We think [the tilt to safe stocks] is going to end and there will be a huge rotation [to value]. Those changes don’t come around very often – we are talking once a decade or so. We are willing to be early in doing that.”

In May the team also sold out of the Threadneedle UK Equity Income portfolio – an eight-year holding – and moved into the Majedie UK Focus fund.

Mr Darbyshire particularly favours this fund because of its conviction-led approach.

“They have about 40 stocks,” he said. “There are four portfolio managers who choose 10 best ideas from the funds they manage. Particularly in the UK equity sector, we want a manager with 10 best ideas that you can see are true convictions.

“In a portfolio of 80 stocks, 30 or 40 might have some conviction behind them, but the rest may just be sticking to the benchmark.”