Does your China equity fund invest in Chinese A-share market?

With the improvement of the cross-strait relations and given cultural proximity, Taiwanese investors go gaga for Chinese equity funds. But the financial regulations may dampen their expectations.

Venus Fan 14 May, 2009 | 0:00
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*The complete article is only available in Mandarin

Executive summary in English: In the backdrop of global economy slowdown, China seems to emerge as the sanctuary for the investors around the world with its equity market persistently outperforms the others by a huge margin year to date. With the improvement of the cross-strait relations and given cultural proximity, Taiwanese investors go gaga for Chinese equity market. The asset management companies in Taiwan have capitalized local investor’s fanatic interest in China equities by launching new equity funds investing in China or acting as the agency to distribute the funds that taunt themselves for their equity exposures to China.

However, China equity funds available for sale in Taiwan may fall short of local investors’ expectations for a joy ride with the rise of China’s A-share market due to the financial regulations. On top of the difficulty to obtain China’s QFII quota for Taiwan's mutual fund companies, Taiwan financial authority also places an investing cap on China equities. It capitulates that the weight of A-share stocks in a mutual fund’s portfolio cannot exceed ten percent of its total asset under management. As a result, China equity funds available for sale in Taiwan predominantly invest in H-share stocks or ‘china affiliated’ firms whose revenues are derived from the Chinese market. Given how H-share market has show signs of decoupling from A-share market as of late, the return of China equity funds in Taiwan is not going to reflect the bull runs of A-share equities in China fully. In addition, China’s stimulus plan is more likely to benefit the small or mid cap companies that provide materials such as coal for infrastructures in the mainland China than those firms that listed on Hong Kong Stock exchange. Given the difference in sector orientations, Hang Seng China Enterprises Index lags behind Shanghai and Shenzhen Composite Index by more than 29%. Although such an investment cap limits the funds’ upside captures, it also limits the funds’ downside captures of Chinese A-share market which has shown its volatility in the past.

It is true that deregulation is underway but it is a gradual process. As much as the hype in the market about China equity funds, detailed portfolio holdings of the funds tell a different story.

Recent Perfromance of China Equity Funds AFS in Taiwan :

Name

Weighted Sectors

Return ( %)

YTD

1 month

3 month

6 month

1 year

2008/9/15 to 2009/5/12

Invesco PRC Equity Fund

financialand industrial materials

24.47

8.75

23.58

35.13

-23.55

7.15

JF China A (dist) - USD

Financial, energy and telecom

23.79

8.26

26.79

38.55

-25.30

2.83

Jupiter China Fund Acc

financial and energy

32.87

12.09

27.79

49.72

-30.29

5.79

Allianz RCM China A

financial and telecom

29.62

10.77

32.55

43.42

-16.99

11.17

Hang Seng China Enterprises

financial and energy

23.45

7.19

27.59

35.86

-23.70

0.61

Hang Seng China Affiliated

telecom and utilities

10.24

10.56

14.14

23.30

-31.50

5.70

Shanghai SE Composite

financial and consumer products

44.12

4.51

12.78

40.55

-21.18

29.61

Shenzhen SE Composite

mining, basic metals and infrastructure

57.99

3.67

16.81

73.49

-14.36

55.15

Data Source: Morningstar, return denominated in New Taiwan dollar, , return date as of May 12th 2009

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