- Focus remains on companies with good corporate governance and sensible management
- Fund positioned to benefit from increasing innovation and consumerism in China
- Economic growth in China is slowing, but should be more sustainable over the long term
Martin Lau and the Asian equities team at First State are renowned for their conservative investment approach and focus on quality companies. They favour businesses with differentiated products and services, with good levels of corporate governance and trustworthy management teams at the helm.
The team have delivered exceptional long-term returns; their First State Greater China Growth Fund has grown 226.9%* over the past ten years compared with 149.3% for the average fund in the IA China/Greater China sector. Our analysis suggests the fund has tended to shelter some of investors’ capital in a falling market, while almost keeping pace with a rapidly rising market. We like the team’s cautious approach in what can be a highly-volatile market, although please remember past performance is not a guide to future returns and investing in emerging markets presents greater risk than developed markets.
|Annual Percentage Growth|
| Jan 12 -
| Jan 13 -
| Jan 14 -
| Jan 15 -
| Jan 16 -
|First State Greater China Growth||22.6||-1.5||17.9||-9.5||38.7|
|IA China/Greater China||15.8||-0.7||18.7||-11.4||39.0|
Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2017
Where is the fund invested?
China’s population is ageing. This means there is an increasing number of people requiring medical treatment and social care. Martin Lau invests in companies he believes could benefit from rising healthcare and welfare spending. He focuses on those that could become leaders in the healthcare field, such as CSPC Pharmaceuticals, which are spending more on research and development and creating innovative new drugs.
Innovation is also prevalent in the technology sector. The fund’s exposure to the sector has increased in recent years and currently comprises 35.7% of the portfolio. Internet company Tencent and Advantech, which provides a range of technology solutions, are among the fund’s largest investments.
The fund maintains some exposure to companies that export their goods and services. There have been growing concerns over the impact Donald Trump’s proposed protectionist policies, including tariffs on imports into the US from China, could have on exporters. The manager has therefore only invested in companies where he feels these concerns are unwarranted and have had a disproportionate impact on the share price.
Martin Lau continues to avoid banks and commodity-related companies, which do not meet the team’s strict quality criteria. An improvement in investor sentiment, and rise in commodity prices, has seen these sectors perform well since mid-2016. The fund has missed out on some of the gains made, however, the team believe this change in sentiment will be short-lived. They prefer to focus on companies they expect to prosper over the long term, although of course there are no guarantees.
The fund is a concentrated portfolio of 56 stocks, which is allows each investment to have a meaningful impact on performance however this is a higher-risk approach. It also has the flexibility to invest in higher-risk smaller companies, although our analysis suggests the fund tends to predominantly invest in large and medium-sized companies.
Martin Lau is mindful that China continues to face a number of challenges, including high levels of debt; slowing growth; and a weakening currency. The country is going through a period of change however, as it transitions from being an export-led economy to one focused on domestic consumption. While economic growth is slowing, it should be more sustainable over the long term and the team continue to focus on companies they believe will prevail regardless of fluctuations in the economic cycle.
China also continues to open some of its stock markets, which have historically only been available to domestic investors, to overseas investors. This is seen as an increasing source of opportunity by the team, while it should also lead to greater transparency and governance of China’s markets.