Up close and personal with three investment trust managers
According to Chinese astrology, 2018 could be a difficult when it comes to our health. So all zodiac signs are being warned to pay special attention to our general well-being: 2018 is the ideal time to start eating healthily, doing sports and getting rid of bad habits.
Last year’s ‘fire rooster’ was a particularly good one for investors, with stock market returns of 34.9%* in sterling terms, driven in no small part by Chinese technology companies. Will the year of the brown earth dog, which starts on 16 February, be just as prosperous?
Darius McDermott, managing director of FundCalibre, takes a look:
There are around 4,600 Chinese listed companies to choose from, when it comes to investing. The vast majority are in the capital goods, IT, materials and retailing sectors, but there is also a decent choice in health care, consumer staples, real estate and autos.
An added element to be aware of is that the MSCI Emerging Market index will have around 200 China A share companies added to it from June this year. That means passive funds following this index will need to buy the stocks, pushing up prices.
According to Baillie Gifford, China has the potential to be the “world’s best consumption story”. It’s easy to forget the sheer size of China’s population which, at around 1.4 billion people, is more than four times the size of the United States. As China’s middle class expands (the number of middle-class households is projected to increase from 17% of the total in 2012 to 63% by 2022), the potential for consumer spending growth is enormous. And China now boasts the largest e-commerce market at an estimated at $1.2 trillion. Consumption-related services account for 90% of the country’s GDP growth.
In keeping with the health theme, social infrastructure investment (water, education, healthcare and sports) is growing at a good pace. More R&D spend means more Chinese companies are being awarded patents and the workforce is increasingly well-educated. A lot of the students who study abroad are now returning to China. This group of people form the basis for an increase in knowledge and skilled workforce in China.
Debt is still a huge problem, however. The IMF predicts that corporate, household and government debt will be as big as China’s annual economic output by 2022. This could depress growth in the medium term.
Both the property market and the banking sector are also a concern. The former has seen prices fall in recent months and the latter are basically leveraged plays on the economy and have many issues to work through before they become viable investments.
The manager of this trust is able to make use of Fidelity’s investment licences in China, which are among the largest of any international investor, offering investors direct exposure to the China growth story. Due to its bias towards smaller and medium sized companies in a developing market, it is not for the faint hearted, but those willing to take the risk could be handsomely rewarded over the long term. 6.3%** of the trust is invested in healthcare companies.
The managers of this fund look for well-managed businesses with good corporate governance across Hong Kong, China and Taiwan. It has been a firm favourite of ours for a number of years. Martin and the team have shown that they can consistently produce the goods in any type of market environment. It has an 11%** allocation to the healthcare sector.
This fund’s experienced team has the resources to visit companies on the ground and to do its own in-house research. This gives it a major edge versus many of its peers. The managers have a solid investment process, which focuses on fundamentals. They are not afraid to hold positions that are substantially different from their benchmark, which is dominated by old state-owned companies. It has 3.8%** invested in healthcare stocks.
*Source: FE Analytics. Total returns for the MSCI China index from 28 January 2017 (start of the year of the rooster) to 7 February 2018.
**Source: fund factsheets as at 31 December 2017