FSSA Greater China Growth: May 2022 fund 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, and the managers try to achieve more stable returns compared with other funds in the China sector. The fund focuses on the Greater China region, and invests in companies based in, or that carry out most of their business in, China, Hong Kong, or Taiwan. It could form part of a broader global investment portfolio or diversify the Asian and emerging markets portion. We think China has excellent long-term growth potential, though 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 lead manager of this fund. He is a highly regarded fund manager in the Asia and China sectors and has invested across the region for more than two decades. Lau joined First State Investments in 2002 (now re-branded to First Sentier Investors in 2020) 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 and open about both what has 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 State in 2012 and is responsible for research into Greater China companies.

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

Process

Lau and his team look for quality companies they can invest in for the long term. They like those 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 have the potential to grow earnings sustainably over the long run and be run by reputable management teams that don't take unnecessary risks in the pursuit of short-term gains. Overall, the team are conservative investors, looking after clients' money as if it's their own.

The fund currently mainly focuses on sectors that could hold up well in different market conditions or benefit from rising consumer spending. This includes technology, and companies that produce consumer staples such as food and beverages. Some of the fund's largest investments include tech firms Taiwan Semiconductor Manufacturing Company (TSMC) and Tencent, and China Mengniu Dairy, which makes dairy products. While it mainly invests in larger companies, the fund can also invest in higher-risk smaller companies.

Lau mainly focuses on high-quality companies that are expected to deliver more stable rates of growth over the coming years. But he’s 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, the manager 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, he recently sold and reduced investments in Taiwan, following a period of strong performance. President Chain Store, a Taiwanese convenience store operator, was sold from the fund, while TSMC was reduced, though it remains a large holding.

The Chinese stock market has been weaker recently, so Lau has used this as an opportunity to add to companies at lower share prices. He’s added to existing investments in insurance company AIA and internet company Tencent.

Culture

We like the culture and philosophy that's been cultivated at First State Stewart Asia (FSSA, part of the broader First Sentier Investments 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. As always, we’ll continue to look out for potential further change.

ESG integration

ESG (environmental, social and governance) considerations have formed part of the team’s investment process for decades. The team’s philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and want to make sure it’s run in a way that’ll benefit all shareholders.

ESG issues form a core part of this. For example, they don’t like companies that make reckless decisions in the pursuit of short-term gains, rather than focusing on longer-term, more sustainable growth. In 2019, First Sentier made a firm-wide commitment not to invest in companies whose primary business is to make cigarettes or other tobacco products. This fund also doesn’t invest in gambling or weapons manufacturers. It can invest in any other sector, but companies should cause little, if any, harm to the environment around them or the labour they employ, for example.

The team also engages closely with company management. It helps them make sure management remain on track with sustainability issues and means they can encourage a change in behaviour if required. If they don’t think a business meets their standards, or is doing enough to address a problem, then they won’t invest.

As an example, the team recently engaged with Midea Group, a Chinese electrical appliance manufacturer. They discussed recent senior management changes at the firm, as well as environmental issues, including the prevention of plastic micro-fibre pollution.

Cost

This fund has an ongoing annual charge of 1.07%, but HL clients benefit from an ongoing saving of 0.05%. This means you pay a net ongoing charge of 1.02%. 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 launch in 2003, the FSSA Greater China Growth Fund has performed much better than the average fund in the IA China/Greater China sector. And over the past 10 years the fund has grown 194.10%* compared with 127.79%* for the sector. Other Asia funds Lau has run over his career have also performed well. Our research shows he's achieved this by focusing on the prospects of 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. Past performance isn't a guide to future returns.

Lau and his team are conservative in the way they manage money and 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, rather than chasing short-term fads. It 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, and has struggled amid heightened regulation from China’s authorities, as well as fresh lockdowns from rising Covid cases. While the fund has also fallen in value over the past year, it hasn’t fallen as far as the average fund in the sector. This could put the fund on the front foot when markets rise again.

The fund’s investments in Taiwan and Hong Kong have also recently helped compared with funds focused solely on China, as the Taiwanese and Hong Kong markets have held up better. We expect individual stock picking to drive the fund’s performance over the long term, rather than the country allocation. However, there will be periods where this leads the fund to perform differently from its peers.

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2022.

Find out more about FSSA Greater China Growth including charges

FSSA Greater China Growth Key Investor Information