2016 Awards Winners - Best Greater China Equity Fund - Neuberger Berman China Equity USD A Acc

M: Morningstar N: Neuberger Berman China Investment Team

M: Could you highlight any major changes you made to the portfolio over the course of 2015? Were there any particular holding(s) that drove the fund’s performance for the year?

N: We began 2015 with material off-benchmark exposure within the China A-shares market. As the market continued to rally during the first and second quarter, we took the opportunity to progressively take profit from our A-share holdings. That said, we continued to maintain meaningful exposure to this market segment, and took advantage of the sell-off during the summer to add to certain high quality names in this space. During the third quarter, we also began to increase our holdings in New York-listed ADRs of Chinese companies, as many of these names were negatively impacted by poor investor sentiment despite favourable fundamentals. 

For the year, our exposure in Health Care (particularly in Pharmaceuticals) and Industrials (particularly in Transportation and Clean Energy Vehicles) contributed to relative performance. Our significant underweight in Energy was also a positive performance contributor. As of 31 December 2015, our largest sector underweight relative to the benchmark was Financials, and also held underweight positions in Energy and Telecommunication Services. Our largest sector overweight was Consumer Discretionary, and also held overweight positions in Industrials, Health Care and Utilities. We continue to manage the Fund with a high degree of concentration with its top 10 positions comprising more than 48% of total assets at end of December.

M: What is your outlook for 2016 specific to the markets you cover and how are you positioned to take advantage of opportunities and/or mitigate potential risks?

N: We believe the Greater China equity markets will continue to experience volatility going into 2016. As the PBoC seeks for the CNY to have more flexibility and market determination in its exchange rate, it will likely result in volatility being reflected in both FX and equity markets. Moreover, our expectation is that the Chinese government may accelerate supply-side reforms to help address issues surrounding excess inventories on SOE corporate balance sheets. This may cause short-term pain in certain overcapacity industries such as materials, basic metals and real estate. However, we believe that these reforms could yield long-term economic benefits as well positioned companies with more robust business models emerge. 

Notwithstanding the above, it is important not to forget the many bright spots within the Chinese economy. We continue to identify opportunities within industries demonstrating high visibility of healthy revenue and earnings growth. These include certain “sunshine” industries that comprise environmental services, alternative energy, health care, technology, and to more conventional industries across consumption, insurance and utilities. Indeed, such a bifurcation in the economic structure provides an environment that is conducive to active management and fundamental stock pickers such as ourselves

M: Can you comment on the macro risks facing the global economy, including the US rate hikes, weaknesses in commodity prices and the significant headwinds facing the emerging world? How do these risks affect your investment decisions?

N: Growth headwinds and macro uncertainty is expected to continue to weigh on risk assets in 2016. While we are mindful of such risks, we are of the view that they can be somewhat mitigated through intensive, bottom-up, fundamental research to ensure companies we invest in operate robust business models and have high quality balance sheets. Our investment strategy also tends to be focused on domestically-oriented opportunities within Mainland China. As such, underlying companies are, to some extent, less exposed to certain risk factors associated with global cyclicality.

M: How is your investment team organized? Have there been or do you anticipate any changes to the investment team or structure over the course of the year? Do you anticipate adding to the team in the near future?

N: Our investment team is based across Shanghai and Hong Kong, with the bulk of our resources located in the former. As fundamental, bottom-up stock pickers, we view that being on-the-ground enables better access to information. In particular, it allows our team to be closer to the various companies we research, which often results in differentiated insights versus consensus views. At the moment, we view our investment team to be well-resourced. From our perspective, depth of experience and a strong culture is the key to success for an investment team. We believe that we have been able to strike a good balance between these two ingredients. As such, we do not have immediate plans to make any changes.

M: Can you highlight any areas where you feel that the investment team or the investment process can be improved upon?

N:  In the year ahead, we intend to continue to maintain a high degree of discipline in the execution of our investment process. We also hope to further expand our research coverage to uncover new opportunities in areas associated with China's current growth trajectory, particularly in advanced technologies and other higher value-added industries.

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