FSSA Greater China Growth: May 2021 fund update

Kate Marshall | Mon 24 May 2021

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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 FSSA – 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
• This fund is on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Long-term growth is the main aim of the FSSA Greater China Growth 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. It could form part of a broader global investment portfolio or diversify the Asian and emerging markets 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 is 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 Sentier Investments in 2002 and has since specialised in Chinese companies, 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 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 Sentier in 2012 and is responsible for research into Greater China companies.

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

Process

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.

The fund currently mainly focuses on sectors that could hold up well in a variety of market conditions or benefit from rising healthcare and consumer spending. This includes 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 and Tencent, and China Mengniu Dairy, which makes dairy products. While it mainly invests in larger companies, the fund can also invest in higher-risk smaller companies.

Lau mainly focuses on high-quality companies that are expected to deliver more stable rates of growth over the coming years. But he’s pragmatic in his approach and invests in companies that can be more sensitive to the health of the economy when their share prices look good value.

Last year, when value-focused companies went through a tougher time, he took advantage of lower share prices and added to investments in companies that could benefit as economies reopen from coronavirus restrictions. This includes CK Hutchison, a port operator, and Jardine Matheson, a Hong Kong-based conglomerate, operating in areas such as property, retailing and construction. Ping An Insurance was also added to the fund earlier this year.

This type of company has since performed better, while higher-growth and tech companies have fallen back. Again, Lau has taken advantage of these recent stock market moves by adding to some existing investments in tech firms such as JD.com, one of China’s largest online retailers.

Culture

We like the culture and philosophy that's been cultivated at First State Stewart Asia (FSSA, part of the broader First Sentier 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.

Companies must also consider environmental, social and governance (ESG) factors, and the team won’t invest in tobacco, gambling, or weapons manufacturers. While they can invest in any other sector, companies should cause little, if any, harm to the environment around them or the labour they employ, for example. Over time this has 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 problem, then they won't invest.

FSSA also places emphasis on recruiting and maintaining great people. Every manager and analyst advocate 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 FSSA, 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 Sentier Investments was acquired by Mitsubishi UFJ, a Japanese bank, in 2019. Takeovers can sometimes lead to disruption and corporate change, though positively FSSA 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

Lau has an excellent long-term track record. Since launch in 2003, the FSSA Greater China Growth Fund has performed much better than the average fund in the IA China/Greater China sector. Other Asia funds Lau has run over his career have also performed well. 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. Past performance isn't a guide to future returns.

Lau and his team are conservative in the way they manage money and 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 lag when markets have risen strongly.

Last year, the fund grew 27.1%*, though this was slightly behind the average IA China/Greater China fund. This is mainly because the fund invests less in China A-shares (companies listed on the domestic stock markets) and higher-growth tech companies, which performed well. These companies haven’t done as well so far this year though, and the fund has outperformed. This performance is in line with our expectations. Remember, all investments fall as well as rise in value so you could get back less than you invest.

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2021.

Find out more about FSSA Greater China Growth including charges

FSSA Greater China Growth Key Investor Information