China funds buck stock rout to lead global performance rankings

[LONDON] Mutual funds that invest in Chinese stocks currently dominate fund tracker Lipper's list of the world's strongest performers even though shares on the country's stock markets have plunged almost 30 per cent since June.

Their chartbuster performance has defied turbulent conditions in China, which led to a large number of companies suspending trading in their stocks and a crackdown by the Chinese government on short sellers who can profit from falling stock prices.

The mutual funds' resilience may make them more attractive to retail investors burnt by the sharp drop in Chinese shares. Mutual funds aim to reduce risks for investors by spreading bets across stocks and sectors.

Trading on China's stock markets is dominated by so-called mom and pop investors who conduct an estimated 80 per cent of the trades. They invest directly rather than through a fund which exposes them to wild swings in the market.

Eighty-two of the world's top-100 best performing equity mutual funds in the first seven months of the year focus on picking stocks in China, data from Thomson Reuters fund industry tracker Lipper showed.

Even though the Chinese markets have fallen, dozens of individual stocks are among some of the world's strongest performers because of a rally earlier in the year.

"If you look at the Shanghai and Shenzhen stock exchanges, there has been a huge variation in the performance of stocks this year," Laith Khalaf, senior analyst at London-based investment firm Hargreaves Lansdown, said.

The two exchanges, the Shanghai Stock Exchange and the Shenzhen Stock Exchange, with a combined market value of more than US$8 trillion, are home to more than 400 stocks that have at least doubled their value this year, data compiled by Thomson Reuters showed.

"There has been scope for active managers to differentiate themselves from the index. The scale of the outperformance is nonetheless surprisingly large," Mr Khalaf said.

Undeterred by the volatile market, some foreign investors are already swimming against the tide and buying more shares.

Overall, more than 800 mutual funds focused on China managing nearly $200 billion in assets, returned 20.5 per cent on average during the period, the data showed, more than twice the gain in the CSI300 index of blue chip stocks, whose constituents include large cap companies from the Shanghai and Shenzhen stock markets.

The China winners are led by US$720 million Fullgoal Low Carbon Environment Fund, which gained 129 per cent up to the end of July through its bets on companies such as Shanghai Bairun Flavor and Fragrance Co Ltd and Shenzhen Tempus Global Business Service Holding Ltd.

Other strong performers include AXA SPDB Strategy New Industry Mix, which gained 91.4 per cent and China Universal Private Owned Enterprise Fund that returned 82.5 per cent.

"Even after the stock market correction, valuations for many small and mid cap stocks still remain at a relatively high level," Egdar Walk, chief economist at Metzler Asset Management said in an email.

"The stock market will consolidate and the preferred style will switch from small cap, high growth theme stocks to mid-large cap companies with reasonable valuations," Mr Walk said.

Metzler's China fund gained more than 50 per cent in the first seven months of the year, Lipper data showed.

REUTERS