SA institutional investors should look beyond Naspers for exposure to mainland China
RisCura’s Orient Opportunities China Equity fund has surpassed R13.2bn under management, having just celebrated its third anniversary. This makes it one of the largest, institutional multi-managed China equity funds globally.
The fund allows institutional investors, such as retirement funds and insurers, to benefit from RisCura’s expertise in emerging and frontier markets in accessing a portfolio of active Chinese investment managers, particularly those with investments in listed equity on the Chinese mainland exchanges in Shanghai and Shenzhen.
Since inception, the fund has delivered strong risk-adjusted returns for investors. Up to the end of October 2021, it produced an annualised return of 26.46%, which is 6.3% over its benchmark*.
“The potential to participate in longer term Chinese growth is an exciting opportunity for institutional investors,” says Andrew van Biljon, RisCura portfolio manager for the fund. China is the world’s second largest stock market with more than 4 000 companies on the mainland (A-shares) and 1 500 listed in Hong Kong and elsewhere.
Mainland companies have a market capitalisation of about R130 trillion (US$ 9 trillion) but are underrepresented in global equity indices such as the MSCI Global Emerging Markets equity index. China is around 20% of global market capitalisation but less than 4% of global portfolios. “Some 60% of global equity investments are currently into the US, yet China is set to become the world’s biggest economy by 2030,” van Biljon says.
Turning to retirement funds, van Biljon says that RisCura estimates that only a small percentage of local pensions and provident funds have direct exposure to mainland China shares, with most funds only having exposure indirectly via their local exposure in Naspers, or perhaps via an emerging markets exposure. “This is not optimal for their members as the universe of listed Chinese companies has some of the world’s largest, most innovative and fastest growing companies, and even more interestingly many domestic Chinese companies – largely unknown to western observers – providing products and services to local consumers.”
Van Biljon says that the growth drivers of the Chinese economy have moved on from an infrastructure and inexpensive production / export driven economy and are now broad-based. The world’s largest population is maturing, urbanising, and embracing technology and e-commerce. Additionally, state support through fiscal packages and poverty reduction schemes are providing a material tailwind.
Multi-management a must
The sheer size of the Chinese market, the increasing complexity of the economy, and the uniqueness of Chinese business culture, make it essential to have a range of analysts and managers on the ground, van Biljon says. Add to this the fact that active Chinese fund managers tend to specialise by region or sector and the benefits of a multi-manager approach become obvious.
“Chinese managers have a private equity mindset and portfolios tend to be concentrated in a few companies that they know extremely well.” RisCura’s fund currently includes 10 Chinese specialist managers, which may seem like a substantial number by South African standards, but not when the size of the Chinese market is considered.
Volatility a handsome opportunity
While the concentrated portfolio approach of Chinese managers can lead to strong performance over the long-term, performance can be volatile. The predominance of retail investors in the market is another volatility factor as is the fact that the Chinese market is under-researched by professional investors. This leads to investors, who may be insufficiently informed, withdrawing from the market precipitously as happened in late July this year on the back of regulatory reforms affecting education and tech companies were passed. Over this period (July 2021), the MSCI China and the MSCI China A Onshore indices lost 13.84% and 5.1% respectively.
“Significant dips in the market caused by large drawdowns can create a handsome opportunity for professional, active managers; nor are they uncommon in China given the preponderance of retails investors in the market,” says van Biljon. “But this only serves to further support a multi-manager approach in China. Having a range of managers with different specialisations mitigates the impact of such events, while allowing the fund to unlock opportunities and deliver portfolio returns at much lower levels of volatility.”
*The Fund’s benchmark: 65% MSCI China A Onshore Index + 35% MSCI China Index