The Best of China Fund is designed to give exposure to the growth opportunities present in the Greater China region. This covers stocks listed in Hong Kong, China-A shares, US ADRs and Taiwan.
We have identified structural growth industries which we think are likely to grow over the medium-to-long-term, giving us more confidence companies in these industries can grow their earnings. Within these industries we also apply a set of quantitative filters to identify quality, profitable companies with strong balance sheets. We then look for companies which we think can grow earnings over time, yet are undervalued by the market. This results in an equally weighted portfolio of 32 positions with no benchmark driven constraints.
How do we run the Fund?
In June 2020, we refined the philosophy of the Fund so that it would focus on the structural growth opportunities in China. We have identified seven structural growth areas which we think are likely to grow over the medium-to-long-term:
- Rise of the Middle Class
- Manufacturing Upgrades
- Cloud Computing & Artificial Intelligence
- Next Gen Consumer
- Financial Services
Within these growth areas, we also apply a set of quantitative filters to identify quality, profitable companies with strong balance sheets. Quality is defined as a return on capital above the cost of capital while a strong balance sheet is defined as debt/equity less than 150%. These filters reduce the universe from an initial 800 companies to around 320 companies, of which we pick 32 to form an equally weighted portfolio.
When picking the stocks that go into the portfolio, we first “clean” the financial statements to reflect reality. We are most interested in regular, persistent earnings and so aim to remove non-recurring items. These include one-off gains and losses, as well as government subsidies. We break down the balance sheet to identify sources of both strength and risk. For example, many Chinese companies invest a portion of their cash into wealth management products (WMPs). If these WMPs are high risk they can potentially be written down, meaning they are worth less than their accounting value. In this case, a company’s cash holdings would be far less than they seem. As a result of cleaning the financial statements, we eventually create an accurate cashflow statement built on our own calculations rather than taking cashflows as defined by management. Here we pay attention to the different types of cashflow, each of which reveal different information. Overall, we are looking for businesses with the ability to redeploy cash at a high rate of return.
The next step is to carry out a series of accounting checks. These checks aim to identify anomalies in the accounts, covering revenue recognition, capitalisation and amortisation, asset valuations, effective tax rates and return on cash and WMP.
If we like the business, trust management and trust the accounts, we move onto valuations. We are not interested in stocks where a valuation derating can offset most, if not all, of the earnings growth. Therefore we look for stocks where we believe earnings growth can offset a potential valuation derating. We primarily do this using two methods: a DCF approach and an earnings approach. In the DCF approach, we use different combinations of revenue growth and margins to assess valuations in each scenario. In the earnings approach, we use different combinations of earnings growth and final multiples to assess upside in each scenario. These two approaches allow us to take into account the effect of rising interest rates on valuations.
How do we construct the portfolioThe Guinness Best of China Fund is a concentrated portfolio of around 30 equally weighted stocks. This provides a number of useful attributes:
- It reduces stock-specific risk, as we will not be overweight in a small number of favourite companies.
- We will not have a long tail of small holdings in the portfolio, which can be a distraction and a potential drag on performance.
- It instils a strong sell discipline as we must typically sell a position in order to make way for a new one; and we must constantly assess the companies we own in the portfolio in comparison to the rest of the universe available to us.
- We are truly index independent. All companies held are weighted equally without regard to their weighting in the benchmark index, so our portfolio has a high active weight.
Edmund has managed Asian Funds since 1994 both from London and from Hong Kong.
Edmund worked for ten years from 1993 for Guinness Flight, which became Investec after the merger in 1998. After joining the Far East Investment Desk in 1994, he served as a member of the investment team managing the China & Hong Kong Fund (now the Guinness Atkinson China & Hong Kong Fund, for US investors). He moved to Hong Kong and became the Fund’s lead manager in 1998.
In addition, Edmund has managed the Guinness Atkinson Asia Focus Fund (for US investors) since 2003, and the Guinness Atkinson Asia Pacific Dividend Fund (for US investors) since its inception in 2006.
Edmund graduated from Christ Church, University of Oxford, with a Master’s degree in Management Studies and has a Bachelor’s degree in History from the University of York. He is also an Associate of the Society of Investment Professionals.
Edmund is head of Asian and Emerging Markets investments.
Sharukh Malik, CFA
Sharukh joined Guinness Asset Management as an investment analyst in 2015. He became co-manager of the Best of China Fund in 2020. Sharukh graduated from Fitzwilliam College, University of Cambridge, in 2014 with a degree in Economics.
|Fund||Best of China Fund||Date (period end)||31.08.2018|
|Index||MSCI Golden Dragon||Fund Launch||15.12.2015|
|Sector||IA China/Greater China||Basis||Total return, in GBP|
Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency movement, and you may not get back the amount originally invested.
|Cumulative performance (%)|
|X class (1) (OCF: 1.24%)||Year-to-date||1 year||3 years||5 years||From launch|
|Annualised performance (%)|
|X class (1) (OCF: 1.24%)||1 year||3 years||5 years||10 years||From launch|
|Calendar year performance (%)|
|X class (1) (OCF: 1.24%)||2013||2014||2015||2016||2017|
|Discrete year performance to date (%)|
|12 months ending:||Aug-14||Aug-15||Aug-16||Aug-17||Aug-18|
|Fund X Class (OCF: 1.24%) (1)||0.00||0.00||0.00||36.74||-3.51|
|Fund C Class (OCF: 1.99%)||0.00||0.00||0.00||35.67||-4.24|
(1) The performance numbers displayed here are calculated in GBP (Sterling). Please note: The Fund's X class was launched on 15/12/2015.(2) The performance of the IA China/Greater China sector average is based on the highest fee share class of each constituent fund, e.g. X class for the Guinness China & Hong Kong Fund, with an OCF of 1.24%.
Latest Guinness Best of China Fund Report
The Guinness Asian Equities team assess the impact of the recently imposed tariffs
Edmund Harriss looks at what is driving the recent market retreat
Edmund Harriss discusses the meaning behind the MSCI’s decision to upgrade Chinese A shares
|For information on the Fund’s current investments, please see the latest fact sheet:||English||French||German||Italian|
|Sharukh Malik (30/06/2020)||Edmund Harriss (15/12/2015)|
|Benchmark||MSCI Golden Dragon Index|
|IA sector||IA China & Greater China|
|Underlying currency||US Dollar|
|Valuation||2300 Dublin time|
|Deal cut off time||1500 Dublin time|
|Year end||31 December|
|Administrator||Link Fund Administrators (Ireland) Ltd|
|Custodian||Brown Brothers Harriman|
|UK Reporting Fund status||Yes|
|Class||OCF current||Max. Initial Charge||Min. Investment||ISIN||SEDOL||Bloomberg|
|Guinness Best of China Fund C EUR ACC||1.99%||5%||€0||IE00BZ08YS42||BZ08YS4||GUBOCCE ID|
|Guinness Best of China Fund C GBP ACC||1.99%||5%||£0||IE00BZ08YR35||BZ08YR3||GUBOCCG ID|
|Guinness Best of China Fund C USD ACC||1.99%||5%||$0||IE00BZ08YT58||BZ08YT5||GUBOCCU ID|
|Guinness Best of China Fund I USD Acc||0.89%||0%||$10,000,000||IE00BMYPNC70||BMYPNC7|
|Guinness Best of China Fund Y EUR ACC||0.89%||5%||€0||IE00BZ08YW87||BZ08YW8||GUBOCXE ID|
|Guinness Best of China Fund Y GBP ACC||0.89%||5%||£0||IE00BZ08YV70||BZ08YV7||GUBOCXG ID|
|Guinness Best of China Fund Y USD ACC||0.89%||5%||$0||IE00BZ08YX94||BZ08YX9||GUBOCXU ID|
|Guinness Best of China Fund Z GBP ACC||0.74%||0%||£0||IE00BZ08YY02||BZ08YY0||GUBOCZG ID|