The headlines over the past few months have not made pleasant reading for investors in Chinese equities.
The decision by the Chinese government to flex its muscles across numerous sectors was nothing new but still resulted in uncertainty and volatility.
The market has now fallen 17 per cent year-to-date. But while it may appear the Chinese government is becoming hostile to entrepreneurs and profit-makers, the counter argument is if you understand and appreciate these corporate governance risks, then the market is now markedly cheaper.
Those backing the long-term China story will have already become comfortable with investing in A-shares – these companies currently make up 11.5 per cent of the MSCI China, but that is set to rise to 40 per cent in five years.
In a world where markets look expensive and heavily correlated, A-shares offer a great opportunity for diversification. Unlike US equities, figures show China A-shares have been uncorrelated to global equities in the past decade.
They were also less affected by the recent clampdown by the Chinese government, with A-shares tending to feature companies in sectors like industrials, healthcare and consumer goods.
There is also a diversity of returns, with a consistent rotation in the best-performing sector in recent years.
I recently read that notinvesting in China A-shares means missing 70 per cent of the China equity opportunity set – that is a big chunk of the market to ignore.
But you need an experienced hand in this space – step forward this week’s fund, headed by Anthony Wong and Kevin You. The team behind the Allianz China A-Shares fund has been operating in the market far longer than most of its competitors.
As the name suggests, the fund only invests in Chinese A-shares. The managers do not rely on simplistic investment screens despite the very large nature of the A-share market. However, they do exclude stocks below $1bn (£752m) market cap to remove the smallest companies with low liquidity.
Each analyst on the fund covers 30 to 50 stocks in depth with a lighter monitoring of around another 100 names. The approach is narrow and deep with research focused on parts of the market that are ignored by others.
The fund has a 'growth at a reasonable price' philosophy. The managers have three main investment considerations. Firstly, is the company growing faster than the market and is the growth sustainable? Secondly, does the company have a strong balance sheet and is it well capitalised? The managers look to see if its cash flow has a favourable outlook and transparency of accounts, as well as assessing company culture and management.
Finally, they will look at valuation using a variety of different metrics depending on the industry.
The team also benefits from the Grassroots Research division of Allianz Global Investors. Grassroots is a separate entity that conducts investigative research at a local level. This allows the team to get information faster and more accurately than the market. The team typically commissions 45 Grassroots reports a year.
