Chinese shares have historically been very volatile and subject to extreme speculative activity; valuations for attractive companies can be, in our view, excessive. Consequently, many fundamental investment managers have been underweight to China for quite some time.
While the latest rally was not easy to predict, we did consider it a possibility when MMA plans were announced in April last year. So we stepped up our research on Chinese companies, making several trips to China.
In November 2014, Chinese authorities made about 560 mainland stocks available for purchase by non-Chinese investors through the Hong Kong Stock Exchange. After running them through our quantitative and qualitative screens, we found only a small number that met our criteria.
So we have added those names to the portfolio when able to do so at valuations that are not excessive. But we have generally kept our holdings in individual Chinese companies smaller than our typical position sizes.
One such stock is Value Partners, the first asset management firm to be listed in Hong Kong. Founded in 1993, it focuses on the Greater China region, with offices in Beijing, Chengdu, Shanghai, Singapore and Taiwan, and has assets under management of $14.7 billion. We believe its knowledge and experience will make it a leading beneficiary of the MMA programme.
From a portfolio management standpoint, China still presents challenges. But the MMA programme is a sign that it will continue to open its economy and financial markets to foreigners, and will continue to liberalise access to its currency.
We’re approaching Hong Kong with a similar balance of caution and optimism. Hong Kong stocks can give us access to companies operating in mainland China, often at more reasonable valuations than the Chinese A-shares.
