If you are looking for growth and have a large portfolio, a high risk appetite and a long-term investment horizon, you could consider a small allocation to a potentially high-growth investment such as a China equities fund. This country is one of the fastest growing emerging markets because it has a growing middle class that is increasing domestic consumption. China is also undergoing rapid urbanisation and developing innovative technologies.
Emerging market growth
Outperformance
Good stockpicking
Careful risk management
US-China trade tensions
Volatility
One way to tap into this growth is First State Greater China Growth Fund (GB0033874321), which is managed by Martin Lau and Sophia Li. They aim for long-term capital appreciation by investing in companies with assets in or revenues from China, Hong Kong and Taiwan. They are supported by more than 20 analysts.
Mr Lau and Ms Li invest the fund in quality companies with what they consider to be sensible valuations and good corporate governance. They look for companies with management teams that operate with integrity and risk awareness, have dominant franchises, and the ability to deliver sustainable and predictable returns over the long term. Company visits are an essential part of their investment process.
When they are assessing a business’s management, looking at how it manages environmental, social and governance (ESG) issues is a top priority. The fund's managers say this is because “companies that do not look after their customers, employees, suppliers and the larger community are unlikely to be rewarding long-term investments". They also advise the companies they invest in on ESG best practice.
The fund's managers define risk in terms of permanent loss of capital. They believe that by investing in quality companies and holding them for the long term the risk to capital is greatly reduced.
The fund's largest sector exposures are technology and industrials. It has 53 holdings and its biggest ones include Taiwan Semiconductor Manufacturing (2330:TAI0) and Tencent (700:HKG), a conglomerate that specialises in internet-related services and products.
The fund has beaten its benchmark, MSCI Golden Dragon Index, over one, three five and 10 years.
The fund only invests in China, Hong Kong and Taiwan, so is more exposed to their risks than a broad global emerging markets or Asia fund.
Chinese equities could be volatile due to trade tensions with the US. Although US President Donald Trump and China's President Xi Jinping agreed to continue negotiations at the G20 summit in Japan last month, there is no guarantee that a resolution will be found soon. China’s economic growth is also slowing: its gross domestic product (GDP) grew 6.2 per cent in the second quarter of this year, down from 6.4 per cent in the first quarter.
However, as this growth is still in the high single digits and surpasses the UK’s growth of 0.3 per cent in the second quarter, the companies in the fund could still benefit from good growth. Ben Yearsley, director at Shore Financial Planning, adds: “The fund’s focus on quality stocks means it normally outperforms during downturns.”
The fund doesn't only invest in shares listed on the Chinese mainland, which have been volatile and are very high risk. At present, it has about 23 per cent of its assets in each of Taiwan and Hong Kong.
So if you are looking for some extra growth and have a long-term investment horizon, First State Greater China Growth could be a good addition. Buy. ZB
First State Greater China Growth (GB0033874321)
| PRICE | 1025.80p | MEAN RETURN | 18.66% |
| IA SECTOR | China/Greater China | SHARPE RATIO | 1.23 |
| FUND TYPE | Open-ended investment company | STANDARD DEVIATION | 13.64% |
| FUND SIZE | £471.31m | ONGOING CHARGE | 1.05% |
| No OF HOLDINGS | 53* | YIELD | 1.18% |
| SET UP DATE | 01/12/2003* | MORE DETAILS | www.firststateinvestments.com |
| MANAGER START DATE | Martin Lau (2003) Sophia Li (2013)** |
Source: Morningstar, *First State Investments, **FundCalibre
Performance
| Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | 10-year cumulative total return (%) |
| First State Greater China Growth | 8.27 | 58.66 | 96.18 | 254.78 |
| MSCI Golden Dragon Index | 5.56 | 48.73 | 87.13 | 166.5 |
| IA China/Greater China sector average | 2.38 | 48.02 | 82.69 | 133.8 |
Source: FE Analytics as at 23 July 2019
Top 10 holdings (%)
| Taiwan Semiconductor Manufacturing Company | 6.7 |
| Tencent | 5.6 |
| AIA | 5.2 |
| China Merchants Bank | 4.70 |
| China Mengniu Dairy | 4.00 |
| ENN Energy | 3.90 |
| Shanghai International Airport | 3.6 |
| Advantech | 3.2 |
| CSPC Pharmaceutical | 3.0 |
| Midea | 2.9 |
Source: First State Investments as at 30 June 2019
Sector breakdown (%)
| Information technology | 22.0 |
| Industrials | 17.2 |
| Consumer discretionary | 12.30 |
| Financials | 11.50 |
| Consumer staples | 10.60 |
| Healthcare | 7.40 |
| Communications services | 6.60 |
| Utilities | 6.50 |
| Real estate | 4.30 |
| Cash | 1.70 |
Source: First State Investments as at 30 June 2019
