Up 52% since 1 January, the Chinese market is surprising even the most optimistic of pundits. “But the economic recovery is likely to be subdued”, says Yee Hou Seck, a portfolio manager at the First State China Growth Fund. Sure, car sales are up. But power generation, a reliable economic indicator, fell 4% year-on-year in April. Valuations of Shanghai listed A-Shares, meanwhile, are “generally not cheap, reflecting the fact that the market has got ahead of itself”.
So, if you are after a defensive China play this fund should be right up your street, says Meera Patel, an analyst at Hargreaves Lansdown. Sticking to good-quality companies with solid balance sheets, when the markets “get ahead of themselves” – as they have done recently – “a fund like this doesn’t keep up”. However, over five years it has been flying, returning 188.4% against 74.4% for the MSCI Golden Dragon Index.
Managed by Cambridge graduate Martin Lau, the fund has been domestically focused for the last three years – avoiding export-orientated stocks in favour of firms exposed to consumer demand. Tingyi, a food and beverage manufacturer, is typical. Best known for instant noodles and ready-to-drink bottled tea, its Master Kong brand is a household name. It also boasts a nationwide manufacturing and sales network, which gives it big distribution and cost advantages over rivals. Tingyi generates free cash and offers a return on equity of over 20%.
Then there’s medical-equipment maker Mindray. Its research and development capacity has been upgraded, and it earns an impressive gross margin of over 50% while generating free cash.
Contact: 020-7332 6500.
First State China Growth Fund top ten holdings
| Name of holding | % of assets |
|---|---|
| Taiwan Semiconductor Co | 5.8 |
| Chunghwa Telecom | 4.4 |
| Cheung Kong Holdings | 3.8 |
| Hengan International | 3.7 |
| Jardine Matheson Holdings | 3.4 |
| China Resources Enterprise | 3.4 |
| Yantai Changyu PIoneer Wine | 3.2 |
| Dairy Farm International Holdings | 2.7 |
| China Communications Services Corp | 2.6 |
| China Vanke Co | 2.5 |