Fidelity’s China Focus Fund is gearing up for another year of outperformance after ranking first among Chinese equity funds tracked by Morningstar last year. According to Morningstar, the China Focus Fund has held up significantly better, with minimal losses of 0.66% for the year ended August 31, compared to the Chinese equity category’s 9.45% decline over that period. Its leading Chinese index has lost 3.82% since the beginning of the year. The China Focus Fund is a “contrarian strategy,” said Catherine Yeung, a Hong Kong-based investment director focused on equities at Fidelity International. Unlike value investing in developed markets, which might focus on a sector like utilities, the strategy in China looks for companies doing good business – at a good price. “We go through all sorts of information, talk to competitors, suppliers, balance sheets, accounting, have there been any incidents in factories?” she told CNBC. According to a fact sheet, as of July 31, the China Focus Fund held 80 stocks, mostly from Greater China but also some foreign companies that do most of their business in the country. The fund had $3.72 billion in assets under management at the end of July. “It’s more about finding unloved sectors where the market ignores these companies because of sentiment or a biased view, even though these companies are growing,” Yeung said. Challenging economic environment “China is very, very different now, so you have to be very stock-specific,” she said. Previously, “you could have settled on a name that was determined by the momentum or consensus around an overarching theme.” China’s economy once grew at double digits, catapulting the country from the poverty line to becoming the world’s second-largest economy in just a few decades. In recent years, growth has slowed from high levels – even as Chinese leaders address long-standing debt problems. This year, the economic recovery following the end of Covid controls has not been as strong as many investors had hoped. An accelerating slump in the huge real estate market has also raised questions about China’s longer-term growth. “It is very fashionable or cheap to be underweight China. But we believe there is far too much negative news priced in and sentiment is too pessimistic,” Yeung said. She said clients ask her about China every day, not necessarily about investments right now, but about what’s actually happening. “The whole China story is about resetting expectations,” she said. “We do not believe the China thesis is broken.” After a few gloomy weeks, data released in recent days are showing the first signs of an upward trend. The Caixin manufacturing purchasing managers’ index rose to 51 in August, back above 50 in expansionary territory, after reading 49.2 in July. An independent survey of 1,300 companies by China Beige Book in August found that consumer spending picked up while hiring increased in all sectors except real estate. China has also begun to further ease restrictions on home purchases in recent days. However, analysts generally believe that the real estate sector will have to consolidate as a sector from now on. Support from the stock market Instead of real estate, Yeung expects more people in China to put more money into the stock market. This is in line with a series of policy announcements in recent weeks to support the development of the domestic stock market – and comes at a time when China has opened its financial industry to foreign institutions in recent years. Such changes, however massive, will not happen overnight. Perhaps China’s economy simply needs more time. Yeung said it generally took about 15 months to fully recover from Covid lockdowns in different parts of the world. “China didn’t reopen until January,” she said. As soon as there are signs of a recovery in the manufacturing sector or in confidence, she expects that consumption will initially benefit. Consumer discretionary is the largest sector within the China Focus Fund’s holdings, accounting for about a quarter of the stocks. Alibaba and Macau casino operator Galaxy Entertainment Group are among the fund’s top 10 holdings. Fidelity also has a dedicated China Consumer Fund, which Morningstar says is down 8.75% year-to-date, only slightly better than its peers. Both Fidelity funds have an annual management fee of 1.5%. The ultimate reason Yeung is buying Chinese stocks now is price. “If you think China will retain a key position in the global economy, then now is a good time from a valuation perspective,” she said.
https://www.cnbc.com/2023/09/03/one-china-fund-is-beating-the-others-its-investment-director-shares-why.html One China fund outperforms the others. The investment director reveals why