Investors confident of eastern promise

The rebound of the Chinese equity market since last year is drawing the attention of the European distributors and new products have been launched by both large fund houses and niche players. Atlantis Investment Management, a fund management boutique specialised in Asia including Japan, last year launched an absolute return China fund, called China Fortune Fund, under its Ucits III umbrella product. The Dublin-domiciled fund seeded with just $7m is now $160m (e127m) in size, the vast majority of the assets being sourced from European distributors. The fund has returned over 60 per cent since inception, according to the fund manager, Yang Liu. The fund invests in Chinese equities across the market cap range, in different types of companies in the rather complicated Chinese market structure. P-chips, small mid caps having a private entrepreneurial background and high risk-return profile are favoured, but the fund also invests in B-shares – companies incorporated in mainland China and traded in the two mainland stock exchanges – as well as H-shares, Chinese state-owned companies listed on the Hong Kong and other foreign exchanges. The fund also invest in Redchips, Chinese companies registered outside China but listed overseas. “The proportion of small and medium caps in the Fortune fund is two or three times higher in terms of weighting in comparison to other funds,” says Ms Liu. Fifty per cent of the portfolio is invested in small to mid caps P-shares, with the remaining 50 per cent invested in state-owned enterprises. “We have both a top-down and bottom-up approach,” explains Ms Liu. “Each year we identify investment themes, and we are overweight in those sectors showing sustainable growth.” The bottom up, company visiting driven approach, which characterises all Atlantis funds, aims at picking undervalued growth companies. What is critical, says Ms Liu, is identifying where the earnings come from. “Eighty, ninety per cent of my portfolio is invested in domestic demand driven areas, not dependent on the economic cycle,” she claims. More liquid The fund currently invests in around 50 companies. “Fifty per cent of the fund is buy-and-hold approach, 50 per cent is traded-oriented approach and will be more liquid.” Ms Liu also manages a mid to small cap biased, long-only, buy and hold approach fund, called Atlantis China fund, which was launched four years ago. The fund is more volatile, having a more concentrated portfolio, where the top 20 per cent of stocks account for around 70 per cent of the portfolio. The fund, at $210m, has reached almost its full capacity of $250m, says Ms Liu. ABN Amro Asset Management, which also has two funds invested in China, takes rather a different approach. The most recent one, China A-shares fund, was launched at the beginning of the 2006 and is now $200m in size. A-shares are companies incorporated in mainland China and traded in the mainland markets. Only Chinese and selected foreign institutional investors are allowed to trade them. In the process of receiving the second chunk of qualified foreign institutional investors (QFIV) quota from the Chinese government, Cathy Chang, portfolio manager at the fund explains that they targets “positive capital appreciation gains.” Their bottom up company visiting-driven approach is based on the fundamental research done by the team in Bejing, says Ms Chang. The banking sector is going through a reform phase and their profit growth will be even greater than the business sector, forecasts Ms Chang. The machinery sector is also in rapid growing phase. Companies are able to produce more value added products, unlike in the past when they had to import key components from foreign manufacturers. Ten years ago the Dutch-based asset management company launched its first retail fund in the region, the China Equity Fund, domiciled in Luxembourg, which has now reached $450m of assets. The fund is invested mainly in H-shares, which tend to be large, more established companies and partly in Redchips, explains Ms Chang. “Most of the H-shares companies are still largely owned by the government and, in terms of corporate governance, they are more secure than privately owned companies.” Indeed, corporate malpractice and poor corporate governance are the main risks of investing in China, which is still an emerging market, say the fund managers. Liquidity risks are also strong, but there is optimism for the future. “China is still in an emerging market phase, but in the long term the Chinese market is going to be like the US market, in terms of size. You can always identify investment opportunities.”