Guinness China & Hong Kong Fund

Transcription

1 A high conviction equity fund managed by Edmund Harriss investing in stocks of Chinese and Hong Kong-based companies or multi-national companies doing business in China and Hong Kong. INVESTMENT COMMENTARY January 2014 The Fund Objective The Guinness China & Hong Kong Fund s investment objective is long-term capital appreciation primarily through investments in securities of China and Hong Kong. Manager Edmund Harris Launch date Benchmark Hang Seng Composite Index IA sector Investment case China/Greater China China s per capita gross domestic product grew nearly 13 times between 1980 and 2010 (according to data from the U.S. Department of Agriculture Economic Research Service). It took the USA nearly 150 years to match that progress. Mass industrialisation has created new markets for consumer and industrial goods and services, accelerating China s economic growth. On the doorstep of this vast superpower sits Hong Kong, a worldclass financial, marketing and technical centre. We think China s rise and the Hong Kong marketplace will have profound implications for our global future. Now you can participate in China s transformation to an industrialised, consumer society, as well as Hong Kong s continued growth as China s most sophisticated commercial centre. Our China and Hong Kong Fund invests in stocks of companies that are traded on the China or Hong Kong exchanges or that do at least half of their business in China and/or Hong Kong. 2014: Annual review In 2014 the Fund rose 2.2% compared to the benchmark Hang Seng Composite Index which rose 3.9% (total return in USD). China s macro-economic backdrop remains difficult because of its interconnectedness, but we believe the situation is not critical. The effort to reduce investment and boost consumption is bound up with debt growth over the past few years, which in turn is the result of poor capital allocation stemming from a financial system sorely in need of reform. The process of unpicking this, deleveraging, reducing excess capacity and re-pricing capital on a market basis all combine to slow economic growth. The government therefore faces the challenge of how to support growth in the short term without undermining its core efforts over the long term. Domestic market sentiment has clearly been boosted by recent policy moves, which have been perceived as market-friendly. On closer inspection the central bank can be seen to be acting with some subtlety. The interest rate cut that sparked the rally was asymmetric it will compress bank margins and will also force banks to move assets from the financial (interbank) sector into the real economy. The move to allow deposits from non-financial institutions to be included in the loan-todeposit ratio calculation will allow that switch to happen. Importantly, neither move constitutes an additional liquidity injection but is instead a reallocation of capital. By contrast, a move to reduce the required reserve ratio (with its consequent liquidity release) may be viewed positively by the market but would, in our view, be a bad sign. In the last three months of the year China s domestic stockmarkets staged a dramatic rally. The Shanghai Shenzhen CSI 300 index of domestic Chinese A shares rose 39.6%, with the bulk of gains generated since the announcement of an interest cut on 20 th November Their Hong Kong-listed (H share) counterparts Tel: +44 (0) info@guinnessfunds.com Web: guinnessfunds.com Guinness Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

2 rose a more modest 15.0%, moving A shares from a 6.6% discount to H shares at the start of the year to a 28.1% premium. Hong Kong shares, as measured by the Hang Seng Index, rose only 2.9% over the same period. The strength in the Chinese stock markets has been primarily a domestic phenomenon, with little impact on the outside world. International investors have been preoccupied by macro-concerns, including weakness in Europe, a falling oil price and instability within Russia as well as its relations with the outside world. Investors in emerging markets have had to contend with the impact of falling commodity prices, a stronger dollar (and its impact on dollar-denominated debt burdens) and a slowing economy in China. The sudden Chinese stock market take-off looks to be a reflection of domestic sentiment associated with monetary easing as well as being driven by a switch away from real estate investment. There has been significant retail participation, and trade volumes are high. For the portfolio, the strong performers have been the banking stocks bought early in 2014 as well as the old economy stocks deemed to benefit from policy support. The weaker performers include Galaxy Entertainment, the Macau casino operator, and oil names. The anti-corruption campaign now looks like being not just a campaign but a long-term effort to root out or break up vested interests. Luxury spending, of which gambling is a significant component, is part of that effort. Technology names still account for a significant share of the portfolio (24%), and were comparatively weaker at the end of the year. This, we believe, is the result of rotational selling into Chinese financials rather than indicating problems with sector. The business models of the larger holdings (Lenovo, NetEase and Tencent) remain sound, with no signs of erosion in market share or margins. Activity Earlier in the year we increased bank and consumer discretionary exposure and cut back positions in industrial companies and real estate. China Merchants and China Minsheng banks were added to the portfolio on the grounds that valuations more than reflected the risks of a credit crisis in China; those risks have since reduced, in our opinion. We added consumer stocks Dongfeng Motor, Li & Fung (a sourcing agent for international business seeking to manufacture goods in Asia) and Nagacorp, a gaming company. We cut our positions on Dongfang Electrical Machinery, Jiangxi Copper and Kingboard Chemical, which is now diversifying into real estate. We sold the holding in Kunlun Energy in October; energy exposure is now confined to CNOOC (pure oil exploration) and Petrochina (onshore oil and gas). Outlook Recent economic data report that China s economy grew 7.4% in 2014, which is, as press commentators have been quick to point out, the slowest rate in 25 years. But it should also be noted that China s economy is over nine times larger than it was 25 years ago. A reduction in the rate of growth is inevitable. The government is keen to show that it is unworried by this number and that we are now in the new normal. From a practical perspective we believe this means that calls for aggressive monetary easing, big cuts to required reserve ratios and new stimulus packages are unlikely. The problem the government faces is well known: the inefficiencies in the financial system mean that the benefits of broad monetary stimulus do not appear in the places they ought. We believe it likely that economic support efforts are likely to remain measured and targeted. The recent interest rate cut, for example, was structured in such a way as to leave deposit rates unchanged, even though the headline rate was reduced by 0.25% (to support savers and pass on the benefits of falling inflation and therefore rising real deposit rates). We shall therefore see ongoing Short-term Lending January 2015 guinnessfunds.com 2

3 Operations (SLO) to keep short term rates stable, Medium-term Lending Facilities (MLF) to support base money and liquidity management, and Pledged Supplementary Lending (PSL) operations to support infrastructure development as the main monetary tools. As inflation has fallen, we may see further interest rate cuts to help with the debt burden, but pressure will remain to prevent renewed growth in credit. In sum, following the policies of 2014 we expect to see more of the same. State-owned enterprise reforms will be promoted to consolidate and reduce excess capacity in industries such as steel, aluminum and cement. The anti-corruption campaign looks to be increasingly entrenched, on the one hand viewed as an attempt to clear away political opposition and on the other as an honest drive to improve the operational and moral position of the Party. The emphasis on the promotion of consumption, evident in the recent interest rate cuts, has been further bolstered by plans to increase the wages of 40 million civil servants by 60%-100%. The risks posed by the property sector remain evident. High leverage, production ahead of demand and the need to sell inventory to support cash flows will all remain issues in The intersect between the property sector and the battle against corruption adds to the risks. However, given the importance of the property sector to the economy at large, we expect considerable official efforts to be made to maintain stability. In the coming year it seems probable that growth will slow further, with signs that the government now sees 6.5% - 7% as tolerable, in contrast to the view under the heavy industrial model that 8% was the minimum needed to sustain job creation and social stability. The economy will also see benefits from the lower oil price: with imports of around 6 million barrels per day China could save over $107bn (equivalent to 1.04% of 2014 GDP) at a price of $50 per barrel compared to the average price of $101.6 paid in Edmund Harriss Guinness China & Hong Kong Fund January 2015 January 2015 guinnessfunds.com 3

4 PORTFOLIO ( ) Fund top 10 holdings Sector analysis Geographic allocation Netease.com 6.7% Lenovo 5.6% Tencent Holdings 5.5% ICBC 4.5% China Minsheng Banking-H 4.4% China Construction Bank 4.3% DB X-Trackers CSI300 ETF 4.0% China Merchants Bank-H 4.0% BOC Hong Kong 3.9% VTech Holdings 3.6% % of Fund in top % Total number of stocks in Fund 35 IT Financials Industrials Consumer Disc Energy ETFs Materials Telecoms Cash 27.7% 25.1% 15.9% 12.4% 9.1% 4.0% 3.2% 2.5% 0.1% China Hong Kong Cash 0.1% 27.0% 72.9% PERFORMANCE ( ) Discrete years % total return (GBP) 12 months to month end: Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Guinness China & Hong Kong Fund* Hang Seng Composite Index IA Asia Pacific inc Japan Cumulative % total return (GBP) 1 Year /12/2014 month to-date year years years years Guinness China & Hong Kong Fund* Hang Seng Composite Index IA Asia Pacific inc Japan Annualised 10 year % total return (GBP) 31/12/2014 Guinness China & Hong Kong Fund* Hang Seng Composite Index IA Asia Pacific inc Japan 8.51% 11.99% 11.70% Risk analysis 5 years, annualised, weekly, in GBP 31/12/2014 Index IA Sector Fund* Alpha Beta Information ratio Maximum drawdown R squared Sharpe ratio Tracking error Volatility Past performance should not be taken as an indicator of future performance. The value of this investment and any income arising from it can fall as well as rise as a result of market and currency fluctuations. *SIMULATED PERFORMANCE: Guinness China & Hong Kong Fund was launched on The returns stated here are a (composite) simulation based on the actual returns of Guinness China & Hong Kong Fund back to , and Guinness Atkinson China & Hong Kong Fund (a mutual fund for US investors) for any performance data before that date. Both funds are managed in accordance with the same investment process and with mirror portfolios. See Note overleaf. Source: Financial Express, bid to bid, total return, in GBP. January 2015 guinnessfunds.com 4

5 IMPORTANT INFORMATION Note: simulated past performance Guinness China & Hong Kong Fund (Dublin UCITS version) launched on , so no actual performance numbers are available before this date. The investment team has been running the Guinness Atkinson China & Hong Kong Fund (mutual fund for US investors) in accordance with the same methodology continuously since July 1994, and therefore we believe the performance numbers quoted are a fair reflection of what the performance of this Fund would have been. The past performance of the Guinness Atkinson China & Hong Kong Fund is not indicative of the future performance of Guinness China & Hong Kong Fund. Issued by Guinness Asset Management Limited, authorised and regulated by the Financial Conduct Authority. This report is primarily designed to inform you about recent developments in the China and China-related equities invested in by the Guinness China & Hong Kong Fund. It may also provide information about the Fund s portfolio, including recent activity and performance. It contains facts relating to investment markets and our own interpretation. Any investment decision should take account of the subjectivity of the comments contained in the report. This document is provided for information only and all the information contained in it is believed to be reliable but may be inaccurate or incomplete; any opinions stated are honestly held at the time of writing, but are not guaranteed. The contents of the document should not therefore be relied upon. It should not be taken as a recommendation to make an investment in the Fund or to buy or sell individual securities, nor does it constitute an offer for sale. Risk The Guinness China & Hong Kong Fund is an equity fund. Investors should be willing and able to assume the risks of equity investing. 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. The Fund invests only in stocks of companies that are traded on the China or Hong Kong exchanges or that do at least half of their business in China and/or Hong Kong companies; it is therefore susceptible to the performance of that region, and can be volatile. Details on the risk factors are included in the Fund s documentation, available on our website. Documentation The documentation needed to make an investment, including the Prospectus, the Key Investor Information Document (KIID) and the Application Form, is available from the website or free of charge from:- the Manager: Capita Financial Managers (Ireland) Limited, 2 Grand Canal Square, Grand Canal Harbour, Dublin 2, Ireland; or, the Promoter and Investment Manager: Guinness Asset Management Ltd, 14 Queen Anne's Gate, London SW1H 9AA. Residency In countries where the Fund is not registered for sale or in any other circumstances where its distribution is not authorised or is unlawful, the Fund should not be distributed to resident Retail Clients. NOTE: THIS INVESTMENT IS NOT FOR SALE TO U.S. PERSONS. Structure & regulation The Fund is a sub-fund of Guinness Asset Management Funds PLC (the Company ), an open-ended umbrella-type investment company, incorporated in Ireland and authorised and supervised by the Central Bank of Ireland, which operates under EU legislation. The Fund has been approved by the Financial Conduct Authority for sale in the UK. If you are in any doubt about the suitability of investing in this Fund, please consult your investment or other professional adviser. Switzerland The prospectus and KIID for Switzerland, the articles of association, and the annual and semi-annual reports can be obtained free of charge from the representative in Switzerland, Carnegie Fund Services S.A., 11, rue du Général-Dufour, 1204 Geneva, Switzerland, Tel , The paying agent is Banque Cantonale de Genève, 17 Quai de l'ile, 1204 Geneva, Switzerland. Telephone calls may be recorded and monitored. Guinness Asset Management Ltd is authorised and regulated by the Financial Conduct Authority Past performance should not be taken as an Tel: indicator +44 (0) of 20 future performance. The value of investments and any income arising from them can fall as well as rise. info@guinnessfunds.com January 2015 Web: guinnessfunds.com 5