FSSA Greater China Growth Fund: May 2023 update

• This fund is run by a manager and team with a great pedigree of investing in China
• We like the culture and philosophy at FSSA – the managers view themselves as stewards of investors' capital, looking after it as though it's their own
• Martin Lau has an impressive track record of picking some of the country's best-performing companies over the long run
• This fund is on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Long-term growth is the main aim of the FSSA Greater China Growth Fund. To achieve this, the managers focus on the Greater China region, and invest in companies based in, or conducting most of their business in, China, Hong Kong, or Taiwan. Along with long-term growth, the managers strive to achieve more stable returns than other funds in the China sector.

We think the fund could form part of a broader global investment portfolio or diversify the Asian and emerging markets portion. China has long-term growth potential, but a fund focused on a single emerging country is a high-risk option so investors should expect volatility and it should only make up a small part of an investment portfolio.

Manager

Martin Lau is the fund’s lead manager. He’s a highly regarded fund manager in the Asia and China sectors, with over two decades of experience investing across the region. Lau joined First Sentier Investments in 2002 and has since specialised in Chinese companies, though he also manages funds that invest more broadly across Asia. Over this time, he's built an impressive track record investing in these markets.

Lau is a modest fund manager who is candid about what’s worked well and what hasn't in his funds. These are qualities we like. While we rate him highly, he’s also supported by other fund managers and company analysts. Helen Chen was appointed co-manager of this fund in 2019 – she joined First Sentier in 2012 and is responsible for research into Greater China companies.

The entire team follows the same investment process and provides important challenge before stocks make it into their funds. Other fund managers within the team have also established good track records of their own.

Process

Lau and his team look for high-quality companies they can invest in for the long term. They favour companies with a competitive advantage that others struggle to replicate, such as a well-known brand or the ability to raise prices for their products without affecting demand from customers. They should also possess the potential to grow earnings sustainably over the long term and be run by reputable management teams that avoid taking unnecessary risks in the pursuit of short-term gains.

To ensure the fund is well diversified, Lau invests across a range of sectors. The main focus is on sectors that have the potential to hold up well in different market conditions or those that could benefit from rising consumer spending. This includes technology, industrial and consumer sectors. Some of the fund’s largest investments include semiconductor manufacturer TSMC, tech giant Tencent and electrical appliance manufacturer, Midea Group. While the fund mainly invests in larger companies, it can also invest in some higher risk smaller companies.

Lau is pragmatic in his approach and invests in companies that can be more sensitive to the health of the economy when their share prices look good value. In-keeping with his process, he often buys shares in companies that haven’t done as well but have good long-term prospects and sells those that have performed well and now either make up too much of the fund or no longer offer as much value.

For example, Lau recently added to the fund’s investment in Shenzhen Mindray Bio-Medical Electronics, which provides medical devices and solutions worldwide. Lau feels this company is the best in its industry and has appealing long-term growth prospects, so topped up the fund’s investment at what he regards as an attractive share price. On the flip side, Lau decided to reduce the fund’s investment in Shanghai International Airport and Realtek Semiconductor Corporation, following a strong run of performance.

Given the turbulence in China’s stock market more recently, Lau took the opportunity to add to Ping An Insurance Group, which specialises in providing financial and health insurance. He also invested in two new companies, NetEase, a gaming and media company, and Jardine Matheson Holdings, an industrial firm which operates across a range of sectors including property, retail, and construction.

Culture

We like the culture and philosophy that's been cultivated at First State Stewart Asia (FSSA, part of the broader First Sentier Investors group). It places emphasis on recruiting and maintaining great people. Every manager and analyst advocate the team's overriding philosophy. At the same time, their individual personalities are allowed to shine, and they're encouraged to bring their own ideas to the table.

Lau is a Managing Partner of FSSA, so we think he's incentivised to ensure the business, including its funds and people, are successful. He looks after its team of analysts and fund managers, which means he can pass on his knowledge and experience. It also means he has additional responsibilities, but we're confident he spends most of his time focused on looking after his clients' money.

First Sentier Investments was acquired by Mitsubishi UFJ, a Japanese bank, in 2019. Takeovers can sometimes lead to disruption and corporate change, though positively FSSA remains an independent investment team. That said, we will continue to look out for potential further change.

ESG integration

FSSA, alongside the broader First Sentier Investors group, place responsible investing at the heart of what they do. They believe identifying the companies that are driving sustainable outcomes, and whose management have the highest governance standards, are key for long-term returns and keeping shareholder interests aligned.

Every investment team across FSSA has full autonomy to develop their own approach to ESG (environmental, social and governance) integration. The team has integrated ESG considerations into the investment process for decades. Their philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and engage with companies to make sure they're run in a way that'll benefit all shareholders.

Cost

This fund has an ongoing annual charge of 1.09%, but HL clients benefit from an ongoing saving of 0.05%. This means you pay a net ongoing charge of 1.04%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Lau has an excellent long-term track record. Since the fund launched in December 2003 it’s performed much better than the average fund in the IA China/Greater China sector. It’s beaten the average fund in the sector over the last 10 years too, returning 141.19% versus the sectors gain of 88.73%*. Past performance isn't a guide to future returns.

While our analysis shows that the managers' investment style has helped drive performance, it’s been largely driven by the managers' strong stock selection. He focuses on the prospects for individual companies, rather than taking a view of the wider economic environment.

As with any investment in emerging markets, investing in China can be more volatile than developed market investing. Lau and his team are conservative in the way they manage money, they aim to limit losses in a falling market. They do this by investing in companies they think will see consistent demand for their products or services and prosper over the long term. This means the fund has tended to hold up relatively well when markets have been weaker, but lag when markets have risen strongly.

We’ve seen the fund perform this way over the past year. The Chinese stock market has had a tough year, struggling largely because of the uncertainty around China’s economy and apprehension that the economic recovery following the removal of the zero COVID policy, is already faltering. Over the last 12 months, the fund has held up well returning 1.11% versus the average fund in the IA China/Greater China sectors fall of 7.51%*.

A driver behind this performance has been the resilience in the Taiwanese market. The portion of the fund that invests in Taiwan has helped deliver good returns over this year. Cosmetic and fashion retailer, Poya Company, pneumatic equipment manufacturer, Airtac International Group and, electrical component manufacturer, Sinbon Electronics were among the fund’s top performers.

Not all of the fund’s investments have performed well though. The investment in JD.com has struggled over the last year and detracted from performance. This has been driven mainly by new and unexpected competition, coupled with tighter regulatory pressures. Dairy producer, China Mengnui Diary, and, Chinese semiconductor developer, Silergy Corp, have also struggled.

Funds will rise and fall in value, so investors could get back less than they invest.

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2023.

Find out more about FSSA Greater China Growth including charges

FSSA Greater China Growth Key Investor Information