This week’s Top 5 by Morningstar looks at the performance of funds that invest in Chinese A-shares in the year to date. A-shares are shares of mainland China-based companies that trade on the two Chinese stock exchanges in Shanghai and Shenzhen. Since 2003, select foreign institutions have been able to purchase these shares through the Qualified Foreign Institutional Investor programme.
The past few years have been turbulent times for China. The corona pandemic, mounting domestic unrest, geopolitical tensions and a property crisis are just a few examples. Nevertheless, President Xi Jinping is even more firmly in the saddle. Investors looking to invest in China can choose from various types of shares: A, B and H-shares.
Global financial markets have experienced turbulent times in recent years. And nothing could be further from the truth for China. First, of course, there was the corona pandemic that broke out in the Chinese city of Wuhan. The Chinese government applied strict measures in response. While in the rest of the world corona measures are now a thing of the past, in China there are still very strict lockdowns when infections are recorded. Increasingly, this leads to civil unrest and recently even revolt against the government, which is quite unprecedented in the country. Furthermore, the riots in Hong Kong are also still fresh in the memory and highlights another point of unrest within China in recent years.
More turbulence
Add to this the international outcry over human rights, with the most telling example being the treatment of the Uyghur minority, as well as the geopolitical tensions surrounding Taiwan’s position and China’s desire to reclaim it as a renegade province, and the picture of a turbulent period is fairly complete.
But not without mentioning another crisis on the financial front. For that is what the situation in the real estate market can safely be called. It rocked and almost toppled real estate giant Evergrande in 2021. Although the company did not eventually go bankrupt, it was late in making payments on some outstanding loans. Nevertheless, it sent a shockwave through China’s financial system that did not leave global markets unaffected either.
Meanwhile, President Xi Jinping is still firmly in the saddle. At the 20th party congress in October this year, he was re-elected for a third term as president and holds the reins more firmly than ever. Financial markets reacted angrily, although there were few other expectations about the outcome of the vote. For instance, Hong Kong’s Hang Seng Index fell 6%, the biggest single-day drop since the financial crisis in 2008, and the Renminbi also lost solidly on the day he was re-elected.
Three types of stocks
Investors looking to invest in China have a choice of three types of stocks. First, there are so-called H-shares, or shares of Chinese companies listed on the Hong Kong Stock Exchange, or on another foreign exchange. Many investors will be most familiar with this type of shares, as historically these were the only shares they had access to. This was different for so-called A-shares. These are stocks listed on exchanges in mainland China, such as Shanghai and Shenzen, and quoted in Renminbi. Only in recent years has China gradually opened this market to foreign investors. Finally, there are B-shares, which are similar to A-shares but differentiated because they are quoted in foreign currencies, mainly US and Hong Kong dollars.
The performance of A-shares and H-shares can be quite different. For instance, A-shares (measured by the MSCI China A Onshore index) outperformed H-shares (MSCI China index) by a lot over 2019, 2020 and 2021. Although those roles have reversed for this year, the average annual return over the past three years for A-shares is 6.51%, while H-shares suffered an average annual loss of 4.44%.
Top 5
This week’s top five lists the five best-performing funds (of which a distribution fee-free share class is available in the Netherlands) in the Morningstar China-A Shares category based on their performance over the first 10 months of 2022.
Robeco QI Chinese A-share Conservative Equities
With a wide lead over its competitors, Robeco QI Chinese A-share Conservative Equities ranks first in the ranking. The fund is managed by Robeco’s conservative equities team that manages a range of regional products. Of these, the European, emerging market and global equity strategies are tracked by Morningstar analysts, with the emerging market fund receiving a Bronze rating for its share class without distribution fee and the other two funds a Silver rating. The team consists of six managers led by Pim van Vliet and supported by a group of 10 quantitative researchers and a similar group of data scientists. This rules-based, quantitative process is based on extensive academic research, initially conducted by Van Vliet, which shows that investing in low-risk stocks leads to better risk-adjusted returns. With just over 100 stocks, the portfolio has a solid diversification. As of end-October 2022, the portfolio is characterised by a large overweight in the financials and industrials sectors, while defensive consumer staples and especially technology are underweight.
Market Access Stoxx China A
In second place is Market Access Stoxx China A, a product from the stable of China Post Global’s ETF arm. This ETF tracks the STOXX China A 900 Minimum Variance Unconstrained AM Index. The index consists of stocks of Chinese companies traded on the two main stock exchanges in mainland China, the Shanghai Stock Exchange and the Shenzhen Stock Exchange. The stocks are selected and weighted in such a way to reduce the risk of the Index. As of the end of October 2022, the Index consists of 146 names and has a very heavy bias towards the financial sector, which accounts for 42% of the portfolio. In contrast, there is hardly any investment in the consumer cyclical sector and companies from the industrial and technology corner, among others, are underweighted.
This article originally appeared on InvestmentOfficer.nl.
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Ronald van Genderen is senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five mutual funds or providers every week.
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