Report Release Date: 26 Jan 2010
Analyst: Jessie Yung
Executive Summary
People: Martin Lau is a seasoned fund manager in the region. He is backed by experienced comanager Xian Quanqiang and a well-resourced squad of four analysts.
Parent: First State Investments focuses on its key strengths and its compensation plan does a good job of aligning managers’ interests with those of investors.
Process: The stock selection process here seeks high-quality companies that offer sustainable earnings growth and are available at an attractive price.
Performance: The fund has been a stellar performer, beating both the benchmark and Morningstar category average under Lau’s tenure. Investors should note the inherent single-country risk and choppy returns.
Price: This fund’s TER is higher than the China Equity category median.
Morningstar Opinion
Like its sibling, First State China Growth is one of the best of its type.
There are multiple reasons why we hold this fund in such high regard, not least of which is its investment team. Lead manager Martin Lau has a wealth of experience and has managed the fund since April 2002. Lau is also comanager of the shop’s Asia Pacific Fund. Comanager Xian Quanqiang adds to the team’s depth with his focused experience on the Greater China region. The duo is backed by a well-resourced squad of four analysts (with 11 years of investment experience on average) and also leverages the research efforts of the wider First State GEM/Asia Pacific equities team based in Edinburgh, Singapore, and Hong Kong. One of this team’s hallmarks is its leader Angus Tulloch, who has almost three decades of investment experience and has proved to be one of the most astute stock-pickers in the field.
The investment process employed here is not radically different from its peers', but it distinguishes itself in its level of execution. The process has an emphasis on bottom-up stock selection but macro views also play an important role in portfolio construction. For example, the team pared its exposure to industrials in early 2009 in light of oversupply concerns. That said, the team is not prone to making large-scale shifts. Indeed, Lau and Xian are disciplined buy-and-hold investors, as demonstrated by a respectably low turnover ratio of roughly 40%. Consistent with the bottom-up investment philosophy, the duo tends to invest with conviction and is willing to look past short-term noise. One such example is China Mengniu, the milk producer at the heart of the melamine contamination scare in 2008. Lau and the team remained convinced on the stock based on its attractive valuation and growth prospects even after the outbreak of the crisis and throughout 2009.
Country-specific funds--especially those focused on emerging markets such as this--are prone to volatility and should therefore play a niche role in a diversified portfolio. That being said, Lau and the team have done a stellar job for investors. The fund has beaten the Morningstar China Equity category average in each calendar year with the exception of 2008 as the world economic recession hurt the technology products exporting holdings including Kingboard Chemical and BYD Co. More impressively the fund has displayed a lower level of volatility (as measured by standard deviation) than its peers.
The TER is marginally above its Morningstar category average, which, while disappointing, is not enough to detract from the fund’s appeal. Whilst it’s debatable if investors outside of Asia need a dedicated China fund, for those that do First State China Growth's impressive investment team, robust process, and enviable track record make it the standout choice.
*Returns are in USD terms.
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