3/22/2019 12:47:59 AM
Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Tuesday, March 13, 2018

We haven’t heard much about the Chinese economic miracle these days, perhaps mainly because here in Canada, NAFTA – and U.S. president Donald Trump’s tweets and tariffs – have been hogging the economic headlines of late. Nevertheless, the Chinese market continues to soar, and in fact, Greater China equity funds continued to top the category performance rankings for all time frames out to three years. The one-year average return through the end of January 2018 from seven funds in the category was a stunning 42.3%! So, what is happening behind the Great Wall to inspire such success?

According to Jing Ning, Hong Kong-based manager of the FundGrade A+® Award-winning Fidelity China Fund, “The country is emerging from a period of industrial deflation, and supply side reforms have led to better supply dynamics as well as the removal of excess capacity. Growth in consumption and exports has been strong. Meanwhile, the government’s current focus is on deleveraging and regulation in China’s huge and complex financial system.”

All of which bodes well going forward. “[Future] emphasis will be on ‘quality over quantity’ of economic activity in China,” Jing adds. “We are likely to see a renewed thrust on reforms across state-owned enterprises (SoEs), as well as in energy pricing and pro-environmental policies.”

While the Chinese economic and business landscape is changing, though, Jing has no intention of changing her value-contrarian bottom-up approach to the markets. “We gravitate towards value opportunities across the breadth of the market,” she says, “We don’t restrict ourselves to sectors that are traditionally associated with value investing, such as utilities and defensives – we’ll even go into information technology – and we focus on determining the intrinsic value of a company, rather than on themes such as old China vs. new China, or state-owned vs. private enterprise.”

Jing goes beyond the mathematical search for value, though, and seeks quality business models and management teams. She will put management on her radar screen for a couple of months and meet with several members of senior management before investing in a company. And while she covers the broad market, she looks for long-term value.

“We do have a preference for durable business models that offer earnings visibility from a three- to five-year perspective,” Jing adds. “Such stocks often go unnoticed by the larger market, and they trade at attractive asset-based valuations.”

Indeed, this focus on long-term potential is reflected in a low turnover of 18.6% among the fund’s 70 holdings. And while Jing’s bottom-up approach remains unchanged, her aim has been shifting. “We’re now focused on opportunities arising from the long-term structural changes that are underway. These include a shift in the economy towards consumption-led growth, a change in consumption patterns, and reforms in SoEs.”

The manager’s strategy has paid off in handsome long-term performance, with the Fidelity China Fund Series F topping the 10-year peer performance ranks at an average annual compounded rate of return of 9.48% to Feb. 28, compared with 8.0% for the nearest runners-up.

The changing Chinese consumer landscape has led to portfolio adjustments including, for example, a strong position in Gree Electric Appliances. “This company is a market leader in the Chinese air conditioning market,” says Jing. “It has a strong balance sheet, and its management has a clear vision for its future growth drivers.”

The fund is also currently overweight oil and gas giant CNOOC [China National Offshore Oil Corporation]. “The markets are overlooking its excellent cost controls, low debt levels, and strong free cash flows,” says Jing. “The company is a potential beneficiary of a recovery in oil prices as well.”

And of course, as the global economy gathers steam (barring further growth in protectionism), China will be a major beneficiary with its realigned and reformed business/economic platform. “Earnings are continuing to recover strongly in China,” says Jing. “This has eased working capital pressures on the corporate sector.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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