GUINNESS BEST OF CHINA FUND: Backing Chinese firms can lead to a rollercoaster ride but you can still invest for the long term
These are difficult times for investors with exposure to Chinese shares. The country’s stock markets have been hit hard by the regime’s rigid approach towards Covid, resulting in lockdowns, protests – and police crackdowns. There is also the overhanging issue of Taiwan and China’s intentions towards it.
As a result, some investment funds specialising in China have seen the value of their shares shrink by more than 20 per cent over the past year and there is little sign that things will get better – in the short term at least.
Investment fund Guinness Best of China has also seen its portfolio take a battering over the past year, although the 15 per cent slide is less than the average for China funds of 22 per cent. This is primarily because the fund, a minnow at £8.5million, does not have the big holdings in technology stocks such as Tencent and Alibaba that rival funds have. These companies have seen their share prices slide by 36 and 29 per cent respectively over the past year.
Like many funds run by Guinness Global Investors, the Best of China fund runs a portfolio of around 30 stocks with equal weightings (just over 3 per cent) in each stock. It means no one holding dominates the portfolio – and no one investment theme overwhelms. Although individual stakes are allowed to rise to 6 per cent – and fall to as low as 2 per cent – the managers rebalance the fund every quarter, meaning gains are crystallised on strongly performing holdings while more shares are bought in companies whose share price is depressed.
The fund is jointly managed by Sharukh Malik and Edmund Harriss. Although Malik says the long-term case for investing in China remains strong as the country’s manufacturing base becomes ever more ‘sophisticated’, he accepts that in the short term, it’s ‘scary’ to be an investor.
On lockdowns, Malik is confident that by next summer the economy should be opening up more as domestically created vaccines are rolled out, more boosters are given and death rates fall. On a potential conflict with Taiwan, Malik admits that it’s an issue that is at the back of the mind of all fund managers running Chinese portfolios. ‘We need to keep an eye on it,’ he says.
The fund’s focus is on discovering companies with the potential for strong long-term growth in earnings. It means that a Chinese stock universe of 9,500 is whittled down to 680 – with 31 stocks making it into the portfolio. Apart from the Taiwanese holdings, these businesses are either listed on Chinese stock exchanges or in Hong Kong.
Malik, proficient in Mandarin, says the fund is exploring a number of strong investment themes. These include sustainability (for example, the need for more solar energy); the growth in financial services on the back of an expanding middle class; and the electrification of motor vehicles.
All are reflected in the portfolio through respective holdings in Hangzhou First Applied (specialist in solar film); Ping An (insurance); and Shenzhen Inovance Technology (specialists in automotive robotics).
Recent portfolio changes include new stakes in Hangzhou First Applied and the sale of holdings in China Lesso Holdings (exposed to the domestic property market) and China Lilang (a clothes retailer, too reliant on the high street). The fund’s annual charges are 0.89 per cent.
While all China funds have struggled recently, some have reasonable five-year records. For example, FSSA All China and FSSA Greater China Growth have recorded respective returns of 48 and 38 per cent. Over the same period, Guinness Best of China has registered a small loss of 0.3 per cent.