Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Play the Asia Pacific opportunity with less China risk
Investors have long been lured to China for its burgeoning band of rapidly growing companies including national technology champions.
However, a widening regulatory crackdown by the authorities is having a big negative impact on sentiment.
This crackdown has caused significant losses for investors in emerging markets focused funds and investment trusts, many of whom have large weightings to China, and compounds the geopolitical tensions arising from the trade war with the US, the origins of coronavirus, the exertion of China’s power over Hong Kong and its belligerence towards Taiwan.
Despite the situation in China, the wider Asia Pacific and Emerging Markets region, with its youthful demographics, emerging consumer classes and low financial services penetration, still has significant appeal.
Thankfully, among the main Asia Pacific and Emerging Markets funds available to UK retail investors are vehicles with less than 30% of their assets in China and strong performance track records to boot, which facilitate access to these compelling themes. In the current climate, this makes them less risky than China-focused funds and trusts.
WHAT’S BEHIND THE CHINA SELL-OFF?
The recent sell-off in Chinese shares and investment trusts was caused by heightened concerns over the extent of Chinese state intervention in private sector businesses such as education, healthcare, property and technology. For months, the Chinese government has been waging war on private businesses it claims are profiteering at the expense of the broader public.
China’s authoritarian rulers want everyone to have access to affordable education, healthcare and housing in a drive for social equality and to reduce what it sees as financial risk. The Chinese Communist Party is unhappy about the vast private data sets built up by tech firms such as Alibaba, Didi Global and Tencent, which gives them insights into the behaviour of vast swathes of the population.
LIMITED CHINESE EXPOSURE
For example, in the emerging markets trust universe, both Templeton Emerging Markets (TEM) and Fundsmith Emerging Equities (FEET) have less than 30% of their assets invested in China, the former with 29.8% exposure according to FE Fundinfo.
Templeton Emerging Markets is the superior performer over five years, having generated a total return of 87.6% versus 28% for Fundsmith Emerging Equities, based on FE Fundinfo data, although the former is invested in under-fire Chinese giants Alibaba and Tencent and the likes of China Merchants Bank.
The Templeton fund’s managers Chetan Sehgal and Andrew Ness are able to draw on Franklin Templeton’s global team of analysts, which enables them to seek out interesting opportunities rival investors may not have access to and deliver strong performance; the trust’s net asset value (NAV) and share price total returns are meaningfully ahead of those of the MSCI Emerging Markets Index over the past three and five years.
As for the Michael O’Brien-steered Fundsmith vehicle, it does have China exposure through holdings in Tencent and NetEase to name a few, yet as of end July, just 5.9% of the trust’s assets were in China versus 43.6% for India and 17.1% for the US.
In fact, all five of its top performers in the first half to June 2021 were Indian stocks, including medical diagnostics trio Metropolis, Dr Lal Pathlabs and Thyrocare, three beneficiaries of the surge in Covid cases in this immensely populous nation.
Among Asia Pacific trusts, one standout name with sub-30% of assets in China is the Baillie Gifford-managed Pacific Horizon (PHI), which has blown away rivals with a 441.3% return over 10 years.
It is 29.7% invested in Hong Kong and China, with exposure to China ‘A’ Shares a modest 2.3%, with the portfolio also offering exposure to growth stocks in India, Korea, Singapore, Vietnam, Indonesia and Taiwan. Holdings include the likes of Tata Motors, SEA, one of South-East Asia’s online gaming and commerce firms, as well as smartphones maker Samsung to name a few.
Another option for investors concerned over China risk is Pacific Assets (PAC), the Stewart Investors-steered trust with a sustainable investment strategy.
It aims to achieve long-term capital growth through investment in companies in the Asia Pacific region and Indian sub-continent, but excluding Japan, Australia and New Zealand. As of 30 June, China exposure was limited to 9.1%, behind India and Taiwan at 43.8% and 12.3% respectively.
Emerging markets funds with less than 30% exposure to China include Goldman Sachs Emerging Markets Equity (BYZWWN5) with a 27.1% China allocation, which has returned 129% and 89.2% respectively over the past 10 and five years, as well as the John Malloy-managed RWC Global Emerging Markets (BD0CGQ4).
While 29.5% of the portfolio is invested in China, the fund’s focus on growing companies with strong sustainable cash flows and attractive valuations has led it to names such as semiconductor foundry Taiwan Semiconductor Manufacturing, India’s Reliance Industries and Brazilian lender Banco Bradesco.
MI Somerset Emerging Markets Dividend Growth (B4Q0711) has 18.8% of its assets in China, the fund has returned 83% on a 10 year view and offers a decent yield of just below 2%.
Co-managers Kumar Pandit and Mark Williams run a concentrated portfolio of quality ‘conviction’ ideas, with an unwavering focus on companies with prospects for long term cash flow and dividend growth.
Another impressive 10-year performer is Waverton Asia Pacific (B0NLMR0), which has a 28.9% allocation to China according to FE Fundinfo.
The fund is delivering against its stated objective of achieving capital growth and generating an income through a diversified book of Asia-Pacific equities.