Investors have been worried about the ability of China to maintain its growth for a number of years. Last year the country saw a substantial stock market boom end abruptly on “Black Monday” in August.
This year also experienced a turbulent start. However, Charlie Awdry, manager of the Henderson China Opportunities fund, said the country’s transition from reliance on government money was well under way. The country now aims for growth to be driven by consumer spending, which offers lots of opportunities for investors to profit, Mr Awdry said.
The fund has produced impressive performance in the short term, rising by more than 30pc in the past three months. It no doubt benefited from the fall in sterling following the EU vote, but Mr Awdry said growth in a number of his holdings, and in the broader Chinese market, had boosted the fund further.
He started managing the £436m fund 10 years ago, when it came under the Gartmore brand. That firm was taken over by Henderson in 2011. Mr Awdry was joined on the fund last year by assistant manager May Ling Wee.
Here he describes how he finds businesses whose growth potential is underestimated by the market.
How do you identify investments?
We look for growth at a reasonable price. We look for unexpected earnings growth and for companies that have the ability to grow profits. We also look at what the market is expecting and buy shares in companies that can deliver more than that.
This has been borne out recently, as we have just had the interim reporting season in Hong Kong in August and a number of shares produced better than expected results.
Which companies are you invested in?
We have a holding in Tencent, which has grown its mobile gaming business, which is doing well, and it is also seeing growth from advertising.
We have also invested in Shenzhou International, which provides the Flyknit material to Nike and so is seeing growth from the “athleisure” trend. Alibaba is another holding. It is US-listed but is a China stock and has delivered better than expected earnings recently.
However, we prefer privately run businesses, which account for two thirds of the portfolio.
Which companies or sectors do you avoid?
If a growth share becomes loved and experiences a significant rise in the share price we have to think about whether we want to hold it. Could it do more or is the market way too enthusiastic about it?
For this economic environment, we need to be in the best quality businesses with the best cashflow, with resilient sources of demand, and in China that really means the “consumer discretionary”, internet and software sectors.
We avoid indebted companies; we have no banks or property firms.
Performance in the past few months has been strong. Is that driven by sterling weakness or stock selection?
The weakness of the pound has helped, but actually these shares have generally been doing well over recent months. The main driver I think is that the economic outlook is more stable than people thought it might be. Secondly, the reporting season we have just had was really good. We had a lot of growth stocks delivering strong earnings growth.
How do you invest in Chinese firms: through the Hong Kong or Chinese exchanges, or via US-listed companies?
In Hong Kong that market is really no longer cheap. If you want value stocks you have to go into financials, where there are problems.
The “A-share” markets [the Shanghai and Shenzhen stock exchanges in China] are really interesting: they are a little bit wild west and they are post-market-bubble territory, so a lot of people are scared off. That means there is quite a lot of value in certain companies.
What we’ll see over the next three to five years is that all China funds will have more A-shares in them.
Do you invest your own money in the fund?
Yes, of course.
What would you have done if you hadn’t been a fund manager?
A number of years ago I wanted to be a tree surgeon, but I ditched that idea. Fund management was one of those things I decided I wanted to do when I was at university and just pursued it until I was offered a job.
Amaya Assan is a senior research analyst at Square Mile:
China’s transition from a heavy industry-based economy to a consumer and services-led one has long attracted the attention of global investors.
For many fund managers, consumer-oriented companies offer one of the most attractive areas for investment.
Rising urbanisation and income growth are leading to a burgeoning consumer class that is increasingly eager for better goods and services. The obvious beneficiaries are companies focused on innovation and customer service.
The Henderson China Opportunities fund has a much longer history than most UK-domiciled China funds. The fund invests in Chinese and Hong Kong company shares, although investments can include Chinese and Hong Kong companies listed on US stock exchanges, as well as companies that are generating a significant portion of revenue from China but are based elsewhere.
The lead manager, Charlie Awdry, has been involved with the strategy since 2003, and is well acquainted with the history and evolution of many companies operating in this part of the world.
After spending some time in Hong Kong in the mid-2000s, Mr Awdry is now based in London and works with Singapore-based assistant manager May Ling Wee. This allows them to blend on-the-ground company research with decision-making being made without the distractions of the local markets.
The fund’s performance relative to its benchmark since Mr Awdry took charge in June 2006 has been positive, although this masks the fact that performance has been somewhat lumpy with periods of significant underperformance.
The clean share class of this fund is cheaper than many other Chinese-focused funds.
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