Aroau Capital Holding
ACH A-Share Fund No.8
About the Fund
A-shares Fund No. 8 is focused on investing in companies listed and traded on the Mainland China stock market (Shanghai Stock Exchange & Shenzhen Stock Exchange). The fund deploys a balanced value investing approach to harness great Chinese companies under a cautious investment mandate. This fund is suited for investors who are looking to diversify their portfolios with Chinese equities. The A-share fund adopts the principle of value investing and is designed to generate alpha while hedging against uncertainties derived from zero rates
Fundamentally Different
It is important for investors to differentiate China from both the market cycles of emerging and developed economies. The Chinese equity market's correlation with the US indices is under 0.41 while its market fundamentals such as risk premiums and discount rates differ significantly from other capital markets. Compared to their counterparts from developed economies (excluding Japan), the average Chinese consumer has a greater saver's mentality and a more manageable household debt level. On the government's side, more cautious fiscal spending behaviour is derived from the central government's deliberate deleveraging effort since 2017. The nation's debt ratios are forecasted to stabilise by 2021 while GDP growth is measured to remain at around 5.5%. With investors unable to forecast just how long the Fed might maintain zero rates, the importance of a geographically diverse portfolio is more prevalent than ever. As a strategy to minimise liquidity risks while at the same time maximising a portfolio's return-to-risk ratio investors should look to actively incorporate Chinese equities as a primary asset class into their long-term holdings.
Great Companies over Macro-Trends
If China's GDP growth rate was the primary factor for an investor to enter the Chinese equity market, the past five years (2015-2020) would have been, indeed, a very disappointing experience. A China-focused conservative index fund's annual return before the COVID-19 pandemic would have been less than 5.9%. Compared to a US 60/40 portfolio's estimated 10.4% return in the same period, the opportunity loss is less than ideal. The development of a strong investment portfolio focused on Chinese equities should never translate to a bullish bet on China's future economic conditions, at ACH we firmly abide by the same evaluation principles which we use to define great companies across all equity markets and reject the notion that great Chinese companies require a separate evaluation criterion.
Transitioning from Retail-Driven to Institution-Led
The Chinese equity market (A-Shares) has often been characterised to be dominated by retail capital which causes it to operate under more volatile short-term cycles. Recalling the "institutionalisation" process witnessed in the 1980's US equity market, our research tells us that China is currently undergoing a similar process with both international mutual funds and state-owned pension funds building up greater positions into A-Shares. This transitioning environment has derived an ideal market environment for both Alpha seeking and value-driven investors. In a semi-mature market like A-Shares, the key for an investor to maximise his/her return-to-risk ratio is by picking great companies and adopting an active management strategy (offered by A-Share Fund No.8). Positions within the ACH A-Share Fund No.8 are built with a cohesive on-the-ground research process in China and incorporates long-term investment principles which benefit from the undervaluation within a transitioning market environment.
China's Equity Market Structure 2020 & Beyond
A comparison of China’s equity market structure over the past two decades demonstrates a tectonic shift in primary market forces in China's economy. In 1998, the three largest sectors of China's equity market were heavy industry (39%), energy utilities (22%), and minerals (15%). In 2020, this has shifted to IT software (36%), financial services (22%), and recreational services (10%). Following the post-COVID government-led strategy to transform China's export-led economic model into a domestic demand-powered growth model, this alteration cycle in the significance of market sectors is forecasted to continue, signalling a greater opportunity in identifying undervalued assets.
1998 China
