First State Greater China Growth Fund research update

Kate Marshall | Wed 04 March 2015

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The Chinese New Year is underway. Considered an auspicious animal, the Year of the Goat is expected to bring promise and prosperity.

Last year, many investors were caught up in negative headlines surrounding China and avoided the country as an investment destination. Yet many companies have continued to prosper and have seen their share prices rise, in spite of wider economic concerns. Indeed, the Chinese stock market has risen by 32.1% over the past year; though please remember this performance will not necessarily be repeated over the coming year.

The opportunity in China is a long-term story. The Chinese government continues to implement reforms, with the aim of shifting its export-led economy to one focused on domestic consumption. As such, China's economic slowdown could continue as it transitions to a slower, but more sustainable rate of growth.

Martin Lau, manager of the First State Greater China Growth Fund, prefers not to focus on short-term numbers or wider economic concerns. Instead, he focuses on the prospects of individual companies, seeking those he believes will prosper regardless of external factors. He seeks companies with solid franchises, long-term earnings growth and strong management teams, which trade on reasonable valuations.

New purchases over the past year include Lenovo Group, a computer technology company, which was added to the portfolio following a period of share price weakness. Martin Lau expects the company's recent acquisitions to be integrated successfully into the business, while its profit margins could rise on the back of increasing market share.

The manager also currently favours a number of Taiwanese technology businesses that are industry leaders in their respective fields. Positions include TSMC (Taiwan Semiconductor Manufacturing Company), Delta Electronics and Advantech.

While Martin Lau's long-term record is impressive, the fund underperformed its benchmark last year. Negative contributors to performance include China Oilfield Services and CNOOC, which were both impacted by the declining oil price. Pharmaceutical company Tong Ren Tang also fell on the back of weak domestic sales.

Our view on this fund

The fund has delivered exceptional performance over the long term. It is the best-performing fund in its sector since launch in December 2003, as well as over a shorter period of five years, though this is no guide to how the fund will perform in future.

Performance since launch

Past performance is not a guide to future returns. Source: Lipper IM* to 02/03/2015

We favour the manager's relatively conservative approach to investing in what can be a higher risk and potentially volatile market. This means the fund has the ability to capture most of the upside of a rising market, while providing some resilience in weaker markets.

We removed this adventurous fund from the Wealth 150 in December 2011 as First State is no longer seeking new investment. We view this as positive as it should ensure the fund remains a manageable size, allowing Martin Lau to react quickly to developments and take advantage of opportunities when they arise. In our view he is a highly skilled manager and we retain our positive stance on the fund.