Fund groups lacking dedicated A-share analysts

The inclusion of 230-odd China A-shares was a hugely symbolic moment for investors in the region but the fund industry has failed to get ahead of the curve with most firms lacking dedicated teams of analysts or products to invest in the asset class.

Although most asset managers have products aimed at UK retail investors which can invest in China A-shares, very few have dedicated analysts in-house.

Instead most have carved out A-shares support from their existing Asia ex Japan or China research teams.

Portfolio Adviser asked nine asset managers – Schroders, Baillie Gifford, Janus Henderson, JP Morgan Asset Management, Eastspring Investments, Blackrock, Old Mutual Global Investors, Alliance Bernstein and M&G – about the depth of their in-house A-shares capabilities.

While most firms say a good chunk of their analysts could cover A-shares, the number of analysts that actually do cover the asset class on a daily basis is significantly smaller in most cases.

Janus Henderson has only two analysts dedicated to China and A-shares within its Asia ex-Japan team, for example.

Baillie Gifford has 55 investment professionals who could look at and invest in Chinese stocks but only five look at A-shares directly and hold them in their portfolios.

JPMAM, which has one of the largest China research teams of the firms assembled, does not have any dedicated A-shares analysts as such but the asset class is covered by 21 research analysts. Within that is a team of 11 Greater China product analysts that cover A-shares, including dual listings.

Some firms say they do not have separate A-shares analysts because of the way in which their research is conducted.

Schroders, for instance, takes an “All China” approach to China equity research regardless of the listing location of the stock. The FTSE 100 asset manager does have a head of A-shares research, Jack Lee, who is based in Shanghai with a team of four other analysts. It has a further 14 analysts located in Hong Kong, Taipei and Singapore who cover Chinese equities, including mainland stocks.

M&G says its team of central analysts covers sectors as opposed to countries. It allocates analysts to funds that are generalists in remit.

Prudential’s other asset manager, Asia-based Eastspring Investments does not have any dedicated A-shares analysts either. Its China value team looks at both A-shares and B-shares.

But CIO Virginie Maisonneuve says the firm is in the process of building “a very nice team in China” with A-shares-specific analysts but has not publicly disclosed its plans yet.

A-shares funds

UK investors still seem split on just how transformative the MSCI A-shares inclusion will be for emerging markets and Asia.

Though all nine firms Portfolio Adviser consulted have products that can invest in China A-shares many only had a portion of funds that currently do.

OMGI’s China Equity fund, previously run by Josh Crabb, is the fund group’s only product that has positions in A-shares currently. In March it outsourced this mandate to Hong Kong asset manager Ping An.

It has five other funds, including the £528m Old Mutual Asia Pacific fund, that can invest in the asset class.

Baillie Gifford has eight funds that can access A-shares via the Hong Kong stock connect. Only three of its funds – the Great China fund, Asia Pacific fund and Pacific Horizon Investment Trust – are invested in A-shares now.

Only four managers that Portfolio Adviser spoke to – Blackrock, JPMAM, Alliance Bernstein and Schroders – had at least one dedicated A-shares fund.

Another US stock market

But as China opens itself up to more foreign investment, asset managers have been pouring more money into this previously inaccessible part of the market.

JPMAM says it has quadrupled its investments in China A-shares from $1.2bn to $4.6bn within the last three years.

Alliance Bernstein currently has more than $4bn invested in the asset class.

JPMAM’s Austin Forey, manager of the Global Emerging Markets Focused strategy and former self-proclaimed China sceptic, calls the inclusion of A-shares into the MSCI index one of the biggest changes in his opportunity set since he became a fund manager.

“This is a bit like another US stock market emerging into the investable opportunity set for global investors. And I personally don’t think most people in the West have their heads around that in the slightest. It’s still regarded by people running global equity funds as somewhere off benchmark.”

JPMAM’s team currently covers 140 A-shares but Forey expects that number to rise to 200 to 250 stocks within the next one to two years.

He says JPMAM made a deliberate attempt to throw resources at its A-shares capabilities two to three years ago.

“We knew this was coming, and we knew we had to get in front of it,” he says.

“As stock investors we are going to have to get used to the idea that the biggest company in a given industry will be a Chinese company.”

Asia ex China

Numerous commentators have suggested that this move will be a catalyst for launching more Asia ex China funds and create a need for EM ex China funds in the not too distant future.

Plenty have pointed out that China is already over 30% of the MSCI Emerging Market index, although this weighting is almost exclusively made up of stocks outside of mainland China like Alibaba, listed on the New York Stock Exchange, and Tencent, listed in Hong Kong.

The A-shares inclusion added 0.7% to China’s total weight in the index with a 5% inclusion factor for the 234 shares.

But by the time these 230-odd mainland shares are fully included, China A-shares alone could account for between 14% and 17% of the MSCI Emerging Market index, according to analysts.

This would bring China’s total weight in the index closer to 40%, making it by far the dominant country.

Forey says China will likely become a larger part of global equity managers’ universes too.

“If I was running a proper global equity fund, if I didn’t have 20% of my fund in China eventually, I’d be very surprised.”

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