Michael Grimes talks to Fortis Investments about their approach to managing stocks and identifying shareholder value in Chinese companies
A fund manager's approach to China really comes down to their ability to cover the ground and get access to the best and most reliable information. While boutique managers will have their own ways of dealing with this, the ability to identify solid growth potential in China equities should be a given for a group with the strong connections of Fortis Investments.
The company says its Flexifund Equity China ‘A' fund set up in December 2004 and now weighing over US$1.4 bn (€0.9bn) , achieved positive annualised returns in US dollars of over 100% in 2007. Its success is based on a bottom-up investment strategy, achieved through good intelligence gathered locally by its joint venture, Shanghai-based Fortis Haitong Investment Management.
"We take a decentralised management approach," says Wee-Ping Nah, Fortis Investments' director, institutional business development. "We don't want to create a house view that everybody follows. If you do that then typically investment strategies end up depending on a small group of people sitting together a few hours every month."
Fortis Haitong has 25 full-time managers and analysts in China, identifying stock targets, researching the fundamentals of the business and then tracking their management and development. "We don't have particularly aggressive portfolio managers. They have a bottom-up fundamental style. Their intention is to know the companies well," says Simon Godfrey, Fortis Investments' senior product specialist, pan Asia equities. "They are all based in Shanghai, they're all Chinese nationals. They want to know things from the inside."
Most analysts believe that with foreign exposure to Chinese equities currently only standing at a maximum of US$30bn under QFII - around 3% of market capitalisation - there are still major opportunities for growth. Fortis Investments says the major drivers of growth in China for 2008 going to be:
Huge domestic demand for goods and services from China-listed companies as the country's economy and infrastructure develops; Asset reflation or inflation on the back of the expected appreciation of the Chinese currency the renminbi. This particularly applies to companies that have debt denominated in US dollars; Asset injections, where companies that originally listed only subsidiaries on the A-share market five or 10 years ago now have a greater appetite for market capitalisation. To achieve that growth, investors or their representatives must exercise a high degree of diligence before, during and after investment exposure.
"What's most important in China is share-holder value focus," says Godfrey. "Haitong was one of the first managers to look at this, so when an analyst wants to look at a company, they have to make sure they have considered the governance issues. The catalysts are also important; in China they could be regulatory, they could be to do with consolidation of industries, or they could be to do with asset injections. Understanding these a little bit in advance of others and knowing the background is important as well."
This year Fortis Haitong was named as having ‘best risk control' in a survey by Shanghai Securities News. It has also been identified as one of the top 10 fund managers in China for three years in a row by the China Securities Journal, the official publication of the China Securities Regulatory Commission. This may come as no surprise, since the company is obviously well connected, being one of the largest QFII managers. Fortis Investments' has a range of funds managed for global clients, including the Flexifund Equity China ‘A' ‘Yangzi', set up in December 2004. The US$1.4bn fund makes Fortis one of the largest providers of QFII mutual funds.
The Flexifund Equity Small Cap China A, launched in January 2007, has a current size of US$135m. Godfrey says that of the 1,500 or so stocks listed in China, less than 20% are large cap (ie, with a market cap of US$1.5bn or more). With so many small cap stocks available, this fund is all about "avoiding the rubbish".
Flexifund Opportunities China, a new entrant launched in July 2007, is a response to some of the more extraordinary factors at play in China's stock markets. Godfrey says:"At the beginning of 2007, retail investors were buying stocks simply on the basis of price. A stock priced at two yuan was more attractive to them than one costing 10 yuan, which is completely ridiculous, but that's how the market was driven. Some of these stocks you could even find in the MSCI China index. If you had followed that trend, you would have performed better in the first half of 2007. We, through our joint venture, decided not to do that, and were rewarded by performing much better when the market eventually crashed in June and July."
Volatility in China's equities markets is a concern for any responsible investor, but Fortis believes the issue is not so much whether to be exposed to China, but to what degree. "We have some innovative clients who GDP weight their equity holdings. That would bring you to 15% of global equity exposure in China if you did it that way. To go from an MSCI weighting to 15% weighting overnight would probably be a little bit abrupt, but you should think about having more invested in China than the global MSCI indices might suggest," says Godfrey.