China's landscape is clearly changing. GDP growth continues to slow, the government has abolished its one-child policy after 35 years to address aging demographics, and services-based industries such as e-commerce and telecommunications are rising, set to become more important than traditional ones like agricultural, oil and gas, and construction.
But investors remain concerned about market volatility, which has links with the country’s slowing growth. The market tends to disbelieve official GDP figures, leading to concerns about a possible hard landing.
As China’s economic transition to a consumption and services-based economy gathers momentum, Fund Selector Asia compares the First State Greater China Growth Fund with the Value Partners Classic Fund.
Germaine Share, research analyst at Morningstar, has provided a comparative analysis.
Investment strategy review
While both funds do not refer to any benchmark indices and both adopt a bottom-up approach, their investment strategies differ. Each fund is a true reflection of the portfolio manager’s investment philosophy.
The First State fund, led by Martin Lau, applies a bottom-up selection process that involves finding companies with quality management, sustainable and predictable growth and attractive valuations.
As part of the selection process, Lau’s team assesses a company’s management track record and corporate governance. Besides measuring balance sheet health, the team also considers the market valuation of the business.
Share said that Lau invests with a three-year absolute return mindset and pays little heed to the benchmark when constructing his portfolio. For this reason, sectors that are typically smaller in the benchmark may be more prominent in this fund and vice versa. For example, Lau’s August 2014 portfolio had 10.47% of its assets in consumer staples compared with the MSCI Golden Dragon Index’s 3.11% (the index that Morningstar references).
Lau is the final decision maker on the fund. His portfolio can contain 40-70 names. “Lau adheres to an ethical standard for his investments and steers clear of industries such as tobacco and gaming. He is not swayed by what is the latest trend, but only invests in what he is sure of,” Share said.