We discuss with Bin Shi, lead portfolio manager for the UBS China Opportunity Fund, on the key to a fund’s success.
Germaine Share: Hi. I am Germaine for Morningstar’s manager research team. I have Bin Shi with me today, the lead portfolio manager for the UBS China Opportunity Fund. The fund is our Best Greater China Equity Fund at the Morningstar Award 2018. Bin is a manager that we’ve followed for a number of years, and is definitely one of our preferred managers in the China equity space.
Hi Bin. Congratulations and thank you for joining us today.
Bin Shi: Hi Germaine. Thanks for having me here.
Share: So the fund is a five-star fund. It has delivered stellar short- and long- results. What do you think is the key to a fund’s success?
Shi: I think the key really is that, we are really clear about our investment philosophy. And we have implemented it very successfully over the years, as we continue to add to our capabilities. And I think that’s the main reasons for our performance, not just for last year, but also for, you know, three-year, five-year period.
Share: Can you maybe elaborate on what your investment philosophy is?
Shi: Yes. Our investment philosophy is quite simple. We focus on leaders or future leaders in a few sectors, growth sector, because we believe, in a long run, they can deliver much stronger than the overall market. We believe that’s the source of excess return versus the benchmark, versus the peer group.
Share: Great. You are making it sounds a lot simpler than it is, I am sure. So, if you look at the market last year, the sources of return were very narrow, driven mainly by the mega-cap IT stocks like Tencent and Alibaba. But I understand that your mandate kind of limits you from investing more than 10% in each of those individual stocks. So where else did you find opportunities to add value to the fund?
Shi: I think, obviously, the two index heavyweights, Tencent and Alibaba, they did very well, which makes the job of beating the benchmark becoming more and more difficult. Because by regulation, we have to maximize our position at 10%. So which means that, you have to go outside these two heavyweights to find opportunities. And we basically use the same principles – identify leaders in different sectors. And some of these stocks, they actually have outperformed the heavyweights like Tencent and Alibaba, which is why we were able to outperform the benchmark last year.
Share: Can you give maybe give some examples of some of these ideas?
Shi: Yes, I think, in last year, two of the biggest contributors to our performance, one is TAL Education, another one is Ping An Insurance.
Share: That’s very interesting. So last year was a very growth-driven year. Do you see that continuing for 2018? What is your outlook this coming year and how is the fund positioned to capture those opportunities?
Shi: I think a lot of the structural changes within the Chinese economy will continue to happen, will continue to evolve. So I think it’s easy that the long-term trends will continue to play out. The only thing difference is that, in the past, she didn’t get enough credit, which is why the valuation was very reasonable. But after the very stellar performance last year, the valuation has expanded. So I think this year, most of the return would probably have to come from organic growth, instead of pure multiple expansion. So, our outlook for 2018, will continue to be positive on Chinese equities but I think it would be unrealistic to expect the same kind of performance in 2018, like in 2017.
Share: Again, could you maybe share some of the sectors or industries where you are finding those opportunities?
Shi: Yes. Basicallywe tend to focus more on appreciated sectors – sectors maybe small at this point, but in the future, will become more significant. So we have always had overweighed positions in IT, healthcare and also consumer sectors. And that has been consistent over the years.
Share: Yup. That sounds consistent from what we understand of the fund. So, also looking forward this year, MSCI is going to include the A-shares into their indexes. How is the fund positioned to capture the A-shares opportunities and are you guys ramping up the capabilities there?
Shi: Actually we have been investing in the A-shares market since 2007. So we have more than 10 years of experience investing A-shares. We think the A-shares space is actually a very exciting space, because the market tends to be less efficient, and the market tends to be more volatile. Disciplined investors, long-term investors actually can generate big excess return from the A-shares market. Our A-share products, actually their excess return is even higher than our offshore Chinese equity fund. And we believe the inclusion of A-shares into MSCI will change the dynamics in the A-shares market significantly, will change the A-shares market from retail-driven market to become more institutional-driven market.
Share: Great. Thank you so much for your insights and congratulations once again.
View all Morningstar Hong Kong Fund Awards 2018 articles here.
