The Little China Fund That Beat The Big Funds in 2011
April 20, 2012
In a space dominated by big funds, this little China fund recently made quite a statement by beating out its peers over a 3-year time horizon. We examine how the fund did so.
Author : Nick Tay
The Little China Fund That Beat The Big Funds in 2011
Key points: - The China Equity market returned -16.29% in 2011, the second consecutive year of falling markets
- Aberdeen China Opportunities has outperformed the market for the past three years, in 2009, 2010 and 2011, pushing it ahead of the China-H funds
- Nicholas Yeo, Director and Head of Equities at Aberdeen International Fund Managers Limited, attributes the fund’s performance to their investment method which focuses on strong companies that can ride out macroeconomic headwinds
- Investors who seek a China-H fund that tends to outperform in falling markets should consider Aberdeen China Opportunities
…the pony engine had to pull harder and go slower, but all the time it kept saying, “I—think—I—can! I—think—I—can! I—think—I—can!” - Mary C. Jacobs, The Pony Engine (popularly known as ‘The Little Engine That Could’), 1910
The story of the little engine teaches one can overcome seemingly insurmountable tasks through sheer single mindedness and incessantly chanting the ‘I-think-I-can’ mantra.
While mantra chanting is best left to more enlightened folk, there is a lesson for investors in the other lesson the little engine teaches – the single minded pursuit. In investing, it’s often not the team with the highest number of multiple PhD holders, or the billion-dollar computing system, or the massive network of market professionals that wins. Often it’s the team with the single-minded dedication and focus to a single goal (investment returns) that eventually emerges ahead of the pack over time.
Case in point – the spunky little China fund that has stayed fixed throughout market conditions, diligently practicing its preach of “stock picking, stock picking, stock picking.”.
The Roller Coaster Chinese Equity market
To represent the Chinese market, we use the Hang Seng Mainland 100 Index which comprises the 100 largest companies which derive the majority of their sales revenue from mainland China. These companies include H-shares, red chips, and shares of other Hong Kong-listed mainland companies.
The Chinese market is notorious for making monkeys out of managers, and the past three years have been a raging see-saw in returns – from a massive 57.66% return in 2009, to two consecutive years of declines in 2010 (-4.57%) and 2011 (-16.29%) – as shown in Chart 1.
Many funds in the China-H space got chopped up 2011 and 2010. Table 1 displays the yearly returns of funds with a minimum 3-year track record.
Table 1: Yearly Returns, end-2008 to end-2011
Date
HSML100 Index
Aberdeen China Opportunities
DWS China Eqty Fund Cl A SGD
HGIF Chinese Eq SGD AD
JF China A (dist)
Fidelity China Focus-SGD
Schroder ISF China Opp SGD H A Acc
2009
57.66%
62.44%
64.45%
53.62%
58.11%
63.12%
54.70%
2010
-4.57%
16.50%
-7.26%
-7.78%
-1.94%
-3.51%
7.29%
2011
-16.29%
-13.57%
-20.93%
-19.64%
-24.42%
-19.43%
-24.53%
Outperformance in bold. iFAST compilations, as at 31 Dec 2011, in SGD terms, dividends reinvested.
Even the 2011 recommended fund, DWS China Eqty Fund Cl A SGD, underperformed in 2010 and 2011. 2011 was a particularly tough year for fund managers, with only one (little) fund managing to beat the benchmark.
The Little Fund That Could
What exactly is this ‘little’ fund?
Using the fund selector, generate a list with the following parameters:
Main Category: Equity Specialist Sector: General Geographical Sector: China-H I want to view: Funds Info Table
You should then see a list of China-H funds and their corresponding fund sizes (fund size numbers are taken from relevant factsheets). But for the sake of convenience, the data is presented in Chart 2.
The Fund in question is Aberdeen China Equities, a fund with a relatively small amount of assets (see Chart 2).
Intrigued by its recent performance (see Table 1), we wondered what this little fund does behind the scenes to garner such performance, and met with a member of the team to discuss their 2011 performance.
According to Nicholas Yeo, Director and Head of Equities at Aberdeen International Fund Managers Limited, 2011 saw tightening monetary policy on fears of rising inflation, but these factors did not weight heavily on the team’s decision making process. “To us, we are not top-down managers; we do not look at stock based on government policy or macro reasons. We continue to stick to the companies we know have strong balance sheets and are able to ride through tight monetary policy.”
This single-minded focus on stock picking drives the portfolio’s performance. And in 2012, investors who hold this fund can expect more of the same stock picking approach against an array of macroeconomic issues. According to Nicholas Yeo, “We’ve seen a lot of interest in China, mainly on the expectation that the government will start to ease monetary policy because inflation is coming down and the Western world is still very uncertain so the government will maintain a certain level of growth to maintain a certain level of balance in the country. As to how we are positioned – no change! – we continue to stick to the companies that we like and we do not base our positions on trends or on themes.”
We’ve Seen This Before
We wrote about the fund’s performance in a previous Chart Talk, noting that “in down markets, the fund’s defensiveness emerges, outperforming in 7 of 9 quarters, by a margin of 2.76pp which is a fairly decent margin. An extended bear market will likely see this fund emerge ahead of its peers.”
Given the falling markets we’ve seen in 2010 and 2011, the fund’s defensiveness has certainly emerged and put it ahead of its peers in terms of performance. Investors who want a strong China fund that tends to do well in falling markets should definitely give this fund a second glance.
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Nick Tay of the iFAST Content Team is part of iFAST Financial Pte Ltd.
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