FSA took a look at the top ten current holdings in the ten best and ten worst performing China equity mutual funds on a three-year basis, using data from FE.
Although length of holding was not included in the analysis, it is interesting to note that some companies, such as Ping An Insurance, are held both by top performers and bottom performers, and others are found predominantly only in best or worst funds.
Midea Group, a manufacturer of electrical appliances, is among the top ten holdings in six out of ten best performing China equity mutual funds. None of the worst performers holds the stock as one of its top ten holdings.
The Midea stock, which trades on the Shenzhen Stock Exchange, has more than tripled in value during the past three years.
Agricultural Bank of China and Kweichow Moutai, the maker of premium liquor, are both among the top ten holdings in four best performing funds (and only one poor performer).
The shares of the Agricultural Bank of China trade today very closely to their price three years ago, so holding them long term would not have contributed to outperformance. However, if sold sometime in mid-2015, and bought in the early 2016, it would have delivered a very handsome return due to wide swings in price.
The Kweichow Moutai stock, like Midea’s, also more than tripled in value within the past three years, and would have been a very good long-term holding.
Citic Securities and Industrial Bank were held by three top performers and none of the poor performers. The stock price of Citic remained essentially flat over the past three years. The shares of Industrial Bank grew by 70% in the same three years.
On the other hand, Tencent, the internet giant behind Wechat, is one of the top 10 holdings in five poorly-performing funds, and only one top-performer. The Tencent stock also tripled in value between the late 2014 and today, so it cannot be blamed for the funds’ poor performance.
The quality of a fund's management, and its expected returns, cannot be easily deduced from the fund's current holdings without a detailed analysis that takes into account holding periods and correlations with other holdings in the portfolio.
However, China's fund industry is far less mature than its developed market counterparts and some reasonable questions can be raised.
Could it be that managers who hold more traditional businesses like state-run banks, Midea and Kweichow Moutai tend to have risk averse, while holders of the glamorous high flyers such as Tencent tend to be biased toward more risk taking?
Concentration is also an issue because a high weighting of top ten holdings means those names will strongly influence performance.
The top performing funds had, on average, lower concentration, with 32%-52% of their holdings in the top 10 names. The worst performers had higher concentrations, their top 10 names accounting for between 45% and 68% of assets.