The top growth funds are feeling the pain of the China crash

The brutal sell-off in Chinese stocks, which gained momentum this week amid far-reaching regulatory crackdowns, has affected many of the top performing funds investing in the region.

Consumer internet giants Tencent and Alibaba both posted double-digit declines earlier in the week and even after recouping some of those losses over the past two days, they are still declining sharply after a negative run that began earlier this year.

Baillie Gifford China is now nearly 33% behind since the MSCI China index peaked in mid-February, while the Fidelity China Consumer Fund was similarly hit.

In developing markets in general, China-heavy and technology-oriented mandates like Carmignac Emerging Markets – a top performer last year – have also been caught in the downturn. However, the crash has so far dented rather than destroyed the mostly outstanding long-term records of these funds.

“I just think that when you invest in focused, highly persuasive and aggressively focused strategies wherever you invest, you have to take the rough with the smooth,” said Genevra Banszky of Ambroz, fund of funds manager at Smith & Williamson.

“Of course, China is still a developing market and there is uncertainty and volatility to be expected, but I also wouldn’t want to have a US-centered strategy that takes this approach without something else to offset that risk . ‘

The worst hit China funds

Funds Total Return: February 17 – July 27 (%) Fund size ($ million)
TT China focus -36.2 6th
Invesco PRC shares -34.6 381
Mirae Asset China growth share -34.5 371
MCVM China Brands Fund -33.5 10
Fidelity China consumer USD -33.2 5.644
Mirae Asset China industry leader stocks -32.9 49
MS INVF China stocks -32.7 11th
Fidelity China consumers -32.7 376
Baillie Gifford China B -32.5 969
Value Partners All China Equity -32.4 33
Invesco China Focus Equity -32.2 456
EdRF China -32.0 524
HSBC GIF Chinese stocks -32.0 1,131
UBS (Lux) ES All of China -31.8 3,587
UBS (Lux) EF China Opportunity -31.7 11,249

Source: Morningstar

Invesco’s internet-heavy China funds are among the biggest laggards since the Chinese market peaked on February 17th. The company’s PRC Equity fund was down 34.6% through Tuesday July 27, while the MSCI China index fell 30.6%. All performance numbers are in US dollars for comparison.

An effective ban on the private tutoring sector this week has put international investors in nervous overdrive this week. Many funds were already sold out from the sector (at least according to the assessment of the Chinese investment funds). However, concerns were about the expansion of similarly dramatic reforms in other consumer-related sectors that follow shortly after a more rigorous review of the data and the threat that Chinese companies will be forced to abandon US listing.

Significantly, the Invesco fund is a strong investor in healthcare and a number of biotech names, with the allocation in this sector being almost double the overall market at 15.7% at the end of May.

While internet giants have made the headlines, some challengers in the industry have plummeted even harder, such as Baillie Gifford ecommerce favorite Pinduoduo, whose shares have halved in six months.

Strong corrections can be expected in emerging markets like China, which tend to be more volatile. Between 2015 and February 2016, a similar episode saw a much more pronounced drop in the Chinese market of almost 45%.

Since then, funds in the sector have made strong gains, even on this recent sell-off.

Baillie Gifford China, for example, has returned 137% over five years while the Fidelity fund is up 80%. However, the Invesco China PRC Equity Fund was weaker, up 43% versus 68% for the MSCI China index.

Emerging market funds hit by China contagion

Funds Total Return: February 17 – July 27 (%) Fund size ($ million)
Morgan Stanley development opportunities -29.2 29
MS INVF development opportunities -27.3 298
Abaris emerging market stocks -24.9 24
Invesco Emerging Markets Select Equity Fund -24.3 49
Fisher Investments Emerging Markets Responsible Equity without fossil fuels -23.4 121
Carmignac Emergents -21.0 1,321
Carmignac Pf Emergents -20.9 431
JSS Sustainable Equity – Systematic Emerging Markets -20.9 51
Nordea 1 – stocks from emerging markets -20.0 138
Growth in Trinetra’s Emerging Markets -19.4 83
FP Carmignac Emerging Markets -19.2 35
Magellan C (Comgest) -19.1 1,868
Poland Capital Global growth in emerging markets -18.8 3
Comgest Growth Emerging Markets -18.8 3,544
EdRF Strategic Development -18.7 301

In emerging markets in general, Morgan Stanley’s growth stocks-laden funds have shouldered the brunt of China’s turnaround. The bank’s Developing Opportunity fund has slumped 29.2% since mid-February, while the MSCI Emerging Markets Index has fallen 12.2%. At the end of June, around 47% of the portfolio was in China, 10 percentage points higher than the benchmark. Leading food delivery company Meituan is down about 45% in six months after being hit hard by regulatory measures against tech stocks this week as well.

Although the AAA-rated Citywire manager has shunned Xavier Hovasse, Alibaba and Tencent and has done some sort of rotation into value stocks and cheaper markets like Russia and Brazil this year, Carmignac’s emerging markets range has been down 20% also hit hard.

Despite the dramatic movements, professional fund buyers seem to be relatively confident about the crash so far.

James Clark, a senior fund analyst at Hawksmoor, said the company hadn’t changed its allocation to Asia Pacific or emerging markets, or fund selection, but said it was a strong reminder of the risks.

“I don’t think China has suddenly become a bad place to invest, but this is certainly a hurdle along the way and proves that fund managers need to be very well aware of how the sectors they are investing contribute to the Communist Party’s agendas China, ”he said.

“For example, a recent update with the Aubrey Global Emerging Markets Opportunities team showed that managers believe that the latest raid is all about the Chinese government trying to reduce the costs to its citizens in three key areas of theirs To lower life – housing, health and education. “. ‘

The wider slowdown

Beyond the regulatory context, another factor behind the decline in share prices since February is the slowdown in the recovery in China. The country was among the first to emerge from the recession last year, while India and Latin America are still on the brink of further recovery.

China’s gross domestic product (GDP) grew in the three months to the end of June by 1.3%, 7.9% higher than a year earlier, but significantly slower year-on-year than the 18.3% in the first three months of the year. Most economists expect growth of around 6% for the full year.

A look at the different performance of Chinese stocks based on their position in the chart below is also instructive.

The market for A-share companies listed in mainland China has outperformed the broader universe of Chinese stocks. From February 17 to July 28, the MSCI China A Index posted limited losses of -13.9%, not much worse than the broader MSCI Emerging Market Index.

The MSCI China Index, dominated by giants like Alibaba and Tencent, listed outside the mainland in the US or Hong Kong, is down 28.2%. This underscores that funds have very different approaches to investing in China and can produce very different results.

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Additional research by Frank Talbot for this piece.

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