First State Greater China Growth - what makes a quality Chinese company?
Kate Marshall | Tue 06 August 2019
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- A fund for direct exposure to the Chinese market
- Quality companies that focus on sustainable, long-term returns make up the core of the fund
- We like the management team, which has a good track record investing across Asia
Our view
China has grown rapidly in recent decades. It's currently the world’s second largest economy, but at some stage it's expected to overtake the US. Its consumers are earning and spending more, which could help drive growth, while technology is also helping businesses flourish.
We think China's economic transformation creates lots of opportunities for investors. Investing in a single emerging country is higher-risk though and the road to full economic development won’t always be smooth. So any investment here should only be considered for long-term portfolios.
Martin Lau, lead manager of First State Greater China Growth, uses a sensible approach to investing in China. He looks for quality companies, which care about their impact on the environment and society, and are run by management teams that have great track records of running a business. We like these qualities, and this approach has helped Lau to build a strong long-term track record.
We think this fund is a good choice for investing directly in China. It's not currently on the Wealth 50 as there are other ways to access this exciting market at lower cost.
The importance of quality
Quality is at the heart of Lau and his team's investment process. But what does a quality company actually look like?
For the team at First State, quality companies must take into account environmental, social and governance factors. They should cause little, if any, harm to the environment around them or the labour they employ, for example. Over time it's become an increasingly important part of their investment process. And if they don't think a business meets these standards or is doing enough to address a particular problem, then they won't invest.
This is partly why they don't invest in many Chinese state-owned enterprises, which are partially, or majority, owned by the government. These are often larger businesses that may be less flexible, slower to change, or less willing to listen to the concerns of shareholders. The team prefers companies that want to do better and are prepared to adapt to the changing business landscape.
What quality companies are in the fund?
China Mengniu Dairy is currently one of the fund's biggest investments. The dairy business has improved its range of products, which includes fresh and healthy new ones such as yoghurt, cheese and plant protein drinks, and it's stopped making outdated products that make lower profits.
Martin Lau says the company also benefits from an inclusive culture, high standards of corporate governance, and an open and honest management team that are incentivised to do well over the long term, not only for short-term gains.
Taiwan Semiconductor is also held in the fund. It makes chips for other tech companies to be used in products like smartphones. It has more than half the share of the global semiconductor market, generates plenty of cash, and has increased the dividends it pays to shareholders in recent years.
The company's also a leader in improving sustainability, including its environmental impact and energy consumption.
How's the fund performed?
The Chinese stock market had a tough time last year, with investors worried about the impact a US-China trade war could have on both the economy and company profits. Markets have rebounded so far this year though.
The fund's done a good job over the past year and grown 11.9%* compared with 5.3% for the China sector. Please remember past performance isn't a guide to future returns.
| Annual percentage growth | |||||
|---|---|---|---|---|---|
| Jul 14 -
Jul 15 |
Jul 15 -
Jul 16 |
Jul 16 -
Jul 17 |
Jul 17 -
Jul 18 |
Jul 18 -
Jul 19 |
|
| First State Greater China Growth | 5.8% | 13.6% | 27.0% | 14.8% | 11.9% |
| IA China/Greater China | 10.5% | 10.3% | 33.7% | 9.3% | 5.3% |
Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2019
Long-term investors have been rewarded too. Since the fund's launch in December 2003, it's grown 945.5% compared with 479.1%* for the China sector. Performance has been volatile at times though and could be in future too, especially over shorter periods.
That said, the fund's tended to be less volatile than others in the sector. A focus on high-quality companies that often generate more stable returns has helped the fund hold up relatively well during market wobbles. It doesn't go up quite as quickly when markets race ahead though. Like all funds it'll go up and down in value, so you could get back less than you invest.