Why RSMR Rate this Fund

• The strength of the resource in the China team combined with the experience of the lead fund manager. 
• The investment team are based in the region and have strong regional contacts.  
• The fund has a focus on a concentrated number of stocks mispriced by the market.
• New research focus on where there is significant value add in the supply chain.
• The manager aims to deliver double digit growth to investors significantly ahead of China’s slowing GDP.

Fund Process

The team’s investment style is ‘sustainable value’. The team adopts a selective approach to invest in companies with sustainable industry leadership and competitive advantages at a discount to their fair value. Since the appointment of Raymond Ma the analyst team have been encouraged to also look at value chain coverage in three areas: green, EV and industrials adding another dimension to the opportunity set. For example, in the EV chain there are battery makers, chip makers and component makers as well as the actual car manufacturers. Solar has upstream and downstream. Identifying the parts of the value chain with the highest value add will identify companies able to grow much faster than GDP. The manager will not hold significant amounts of money in large state owned enterprises (SOE) in China.  He will focus on a more concentrated bottom-up portfolio, rather than taking macro views with a bias in China to hold private enterprises rather than SOEs. The fund has a concentrated range of 25-40 stocks which are focused on quality companies that are mispriced by the market.

This fund is benchmarked against the MSCI China Index and has around 60% invested in China and 40% in Hong Kong with no exposure to Taiwan. The market cap bias will be mid cap names, typically capitalised between $1bn-$10bn. The manager believes mid cap privately owned companies have better growth potential than state owned enterprises which can suffer from restrictions and policy interference. The fund will also avoid sectors where competitive pressures have intensified such as food and beverage consumer staples. The manager is increasing the focus of the fund on companies using cash flow for overseas expansion which can drive double digit growth. 

The stock screen utilised by the team excludes stocks with a market cap less than $400m and looks for businesses where management have demonstrated a strong track record.  Companies held need a competitive advantage in the industry they operate in, together with financial strength, scale and brand and they must demonstrate they have prospects for sustainable earnings growth over the next 2-3 years.   

When meeting companies managers try to find out how a company is working to differentiate itself from its competitors. They also look at the founders of the company and their backgrounds, together with the company’s product.

When looking at the balance sheet they are trying to understand how a company can access cash and fund future dividend payments. If capital expenditure plans are high they want to ascertain that the company can internally fund its own requirements. 

The investment philosophy has four key elements.  The fund takes a selective and original approach looking for companies and ideas ahead of the market. There is a focus on a small group of companies that the manager believes have sustainable advantages.  These are then held over the longer term rather than shorter term trading positions.  Under researched ideas in mid-caps is a fertile hunting ground for the portfolio.  The manager is looking for a different angle from the market in all stocks held with valuation also important.  The manager also takes into account the total return for the stock looking at both dividend income and potential capital gain.  This fund takes conviction views in favoured companies and the approach is very bottom up driven.

Evaluation

The fund will have a more volatile return profile because of its specialisation and its focus on a single emerging market. It is taking a differentiated approach to investing in China as the manager believes the economy now has different drivers of growth than in the past. The fund is focussed on companies the manager believes have prospects of growing much faster than the wider economy.

Application

Given the specialist nature of the portfolio we would utilise the fund as a satellite rather than core alongside a broader regional Asia ex Japan fund. It is suited for longer term growth orientated investors who recognise single country funds can have periods out of favour with the market.

Our Opinion

The fund has a non-benchmark orientated portfolio with a high active share. The approach is now focussed on companies which will benefit from what the manager believes will be secular growth drivers which are different to the past. The selective approach taken favours under researched names with stocks then held over the longer term.  There is an emphasis on internal proprietary research. Since taking over management of the fund, the manager has reduced exposure to consumer staples and defensive low growth sectors.  

Invesco have a strong China team strengthened by the appointment of Raymond Ma as CIO Hong Kong and China. The manager had built a strong record at Fidelity. It is a useful satellite addition to investor portfolios.