First State Greater China Growth: June 2020 fund update

Kate Marshall | Tue 30 June 2020

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• This fund is run by a manager and team with a great pedigree of investing in China
• We like the culture and philosophy at First State – the managers view themselves as stewards of investors' capital, looking after it as though it's their own
• Martin Lau has an impressive track record of picking some of the country's best-performing companies over the long run

We have added this fund to the Wealth Shortlist of funds chosen by our analysts for their long-term potential.

How it fits in a portfolio

Long-term growth is the main aim of this fund, and the managers try to achieve more stable returns compared with others in the China sector. The fund focuses on the Greater China region, and invests in companies based in, or that carry out most of their business in, China, Hong Kong or Taiwan. The fund could form part of a broader global portfolio, or diversify the Asian and emerging markets equities portion. We think China has excellent long-term growth potential, though a fund focused on a single emerging country is a high-risk option so investors should expect volatility and it should only make up a small portion of an investment portfolio.

Manager

Martin Lau is the lead manager of this fund. He's one of the industry's most highly regarded fund managers in the Asia and China sectors, and has invested across the region for more than two decades.

Lau joined First State Investments in 2002 and has since specialised in Chinese equities, though he also manages funds that invest more broadly across Asia. Over this time he's built one of the most impressive track records investing in these markets.

Lau is a modest fund manager, and is open about both what has worked well and what hasn't in his funds. These are qualities we like. While we rate him highly, he isn't a one-man band. Helen Chen was appointed co-manager of this fund in 2019 – she joined First State in 2012 and is responsible for research into Greater China companies.

They also have a good-quality team of investors around them, who all follow the same process and provide each other with important challenge before stocks make it into their portfolios. Some team members are also portfolio managers with good track records in their own right.

Process

Martin Lau and his team look for quality companies they can invest in for the long term. They like those with a competitive advantage that others struggle to replicate, such as a well-known brand or the ability to raise prices for their products without affecting demand from customers. They should have the potential to grow earnings sustainably over the long run, and be run by reputable management teams that don't take unnecessary risks in the pursuit of short-term gains. Overall the team are conservative investors, looking after clients' money as if it's their own.

Importantly, companies must also 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 the team's investment process. If they don't think a business meets these standards or is doing enough to address a particular problem, then they won't invest.

At the moment the fund mainly focuses on sectors that could benefit from rising consumer spending, including technology, and companies that produce consumer staples such as food and beverages. Some of the fund's largest investments include tech firms Taiwan Semiconductor Manufacturing Company, Tencent, and China Mengniu Dairy, which makes dairy products. The fund can also invest in higher risk smaller companies.

This fund was previously removed from the Wealth 150 in January 2012 as the fund was closed to new money. The main reason was the rate of inflows First State were seeing into the fund, as opposed to the capacity itself. First State also had a greater crossover in holdings between different funds at the time. Given the rate of inflows, they felt the risk could become unmanageable and wanted to act before any potential problem arose.

The team at First State doesn’t think they’re likely to see the see same pressures come to bear in the near term as the Chinese market has since expanded significantly and is much more accessible than it was back in 2012.

First State has always been conservative in the way it’s managed capacity and we think this is a sensible approach.

Culture

We like the culture and philosophy that's been cultivated at First State Stewart Asia (part of the broader First State Investments group). Their philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and engage with companies to make sure they're run in a way that'll benefit all shareholders.

The group also places emphasis on recruiting and maintaining great people. Every manager and analyst is an advocate of the team's overriding philosophy. At the same time, their individual personalities are allowed to shine and they're encouraged to bring their own ideas to the table.

Lau is a Managing Partner of First State Stewart Asia, so we think he's incentivised to ensure the business, including its funds and people, are successful. He looks after its team of analysts and fund managers, which means he can pass on his knowledge and experience. It also means he has additional responsibilities, but we're confident he spends most of his time focused on looking after his clients' money.

First State Investments was acquired by Mitsubishi UFJ, a Japanese bank, in 2019. Takeovers can sometimes lead to disruption and corporate change, though positively First State Stewart Asia remains an independent investment team. That said, we will continue to look out for potential further change.

Cost

This fund has an ongoing annual charge of 1.07%, but HL clients benefit from an ongoing saving of 0.05%. This means you pay a net ongoing charge of 1.02%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Martin Lau has an excellent long-term track record. The First State Greater China Growth Fund launched in 2003 and it's since performed much better than the broader Chinese stock market. Other funds Lau has run over his career have also outperformed their respective benchmarks. Our research shows he's achieved this by focusing on the prospects of individual companies, rather than taking a view of the wider economic environment. As with any investment in emerging markets, investing in China can be more volatile than developed market investing.

Lau and his team are conservative in the way they manage money and they aim to limit losses in a falling market. They do this by investing in companies they think will see consistent demand for their products or services and prosper over the long term, rather than chasing short-term fads.

It means the fund has tended to hold up relatively well when markets have been weaker, but lagged behind when markets have risen strongly. We expect the fund to perform this way in future, but there are no guarantees and past performance isn't a guide to future returns. All investments fall as well as rise in value so you could get back less than you invest.

First State Greater China Growth - performance since launch

Past performance is not a guide to the future. Source: Lipper IM to 29/05/2020

Past performance is not a guide to the future. Source: Lipper IM to 29/05/2020

More on First State Greater China Growth including charges

First State Greater China Growth Key Investor Information