By Olev Edur
The past several years have been as tough on the Chinese investment front as on any other region, with many mixed signals having emanated from that market since 2008. But Kenrick Leung, portfolio manager at Amundi Hong Kong, which sub-advises the Renaissance China Plus Fund
offered by CIBC Asset Management
Inc., believes better times are ahead.
That view is certainly bolstered by the latest fund performance numbers – the Greater China Equity category’s one-year average return of 21.1% for the period ended July 31, 2014 ranked eighth among all fund categories, and the one- and three-month returns through July (7.3% and 11.5% respectively) were tops among all categories. While a few months’ returns don’t necessarily constitute a trend, Leung believes that systemic and administrative changes in the greater China marketplace bespeak continuing strength.
“If we go back to the global financial crisis in 2009, China tried to reflate their economy by making money readily available, and that led to a lot of excesses,” says Leung. “For example, it led to a property bubble, and the banking system was quite shaky.
New brooms sweep clean
“When the new leaders came in [under President Xi Jinping in March 2013], they realized that there were a lot of internal issues that needed to be fixed,” says Leung. “They needed to fix the banking system. SOEs [state-owned enterprises] needed to sell their non-core assets so they could refocus on their core businesses. The leaders also began looking at infrastructure issues – transportation, for example, and clean energy.
“Generally they’ve been focusing on the right things,” Leung adds. “They’ve started aiming for quality of growth rather than quantity, and they’re willing to settle for 6.5% or 7.5% [GDP growth per year] rather than 8% or 9%. They know that the next 10 years are going to be a very important time for China’s development.”
The changes are already having a big impact in the investment marketplace, beyond those implied by the latest fund statistics – Leung points out that valuations are now typically in the high single digits, particularly attractive for investors, on top of which company earnings have in many cases lately been beating expectations.
These macro events are generally not of direct import to Leung, however. “We’re very much a stock-picking fund,” he explains. “We’re strictly bottom up, and don’t take market views.”
Four-step selection process
Rather, Leung’s team at Amundi uses a four-step process to choose stocks that fit into a portfolio consisting of three general categories – 50% to 70% major index constituents (i.e., blue chips), 20% to 30% small and mid-caps that he calls “long-term winners,” and 10% to 20% cyclicals, for which he does admit to looking more at the market fundamentals.
“The first step in the process is idea generation, the next step is preliminary testing, then comes on-the-ground diligence, and finally financial analysis,” Leung explains. “In looking at financials, we consider whether there is a decent upside versus the downside on a risk-adjusted return basis,” says Leung.
“Once we’ve picked a stock, we’re strictly disciplined when it comes to sizing the position,” says Leung. “First we look for a major conviction level – how much is the upside versus the downside. If it’s very asymmetrical, we’ll size it up more.
“If conviction is high but trading liquidity is tight, meaning it will take time to buy the shares, then we’ll size it down a bit,” says Leung. “And if conviction is high but liquidity is tight and volatility is high, then we’ll size it down a bit more.”
As of July 31, 2014, the fund’s portfolio was dominated by financial services companies, comprising 36.4% of the portfolio. The top five holdings made up 25.5% of the portfolio and included Taiwan Semiconductor Manufacturing Co. Ltd. (6.2%), China Construction Bank Corp. H Shares (5.5%), Industrial & Commercial Bank of China H Shares (5.1%), Tencent Holdings Ltd. (4.9%), and AIA Group Ltd. (3.8%).
Taken all together, the macro changes in the Chinese market, coupled with the stringent stock selection process, should help ensure that the Renaissance China Plus Fund continues to maintain its position as a premier fund in a category that now seems poised for renewed and consistent growth.
Courtesy Fundata Canada Inc. © 2014. Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library. Investments mentioned are not guaranteed and carry risk of loss.