China has blossomed in recent years to become the envy of many emerging markets countries. Although the country faces natural difficulties as it adjusts to becoming a free market, it continues to attract solid investment and appears to have enough resources in stock to come in to full flower. One fund that has been there since the start of the rush is HSBC’s Chinese Equity Fund run by Richard Wong.

The Luxembourg-domiciled fund was incepted in 1992 and is a growth oriented entity which invests in companies with significant operations in mainland China. Large, liquid stocks are usually selected and the fund currently has 58 holdings. The fund’s aim is to outperform the benchmark, the CLSA China World index, and be above the sector average over 12 months. It has a five star fund rating from S&P.

Wong took control of the fund in 1997 and in his time there has seen the fund’s size leap from $28m to $312m today. The fund has produced returns of 8.7 per cent annualised over five years against the CLSA figure of 4.2 per cent. This year it has returned around 25 per cent so far according to Wong, who predicts that 10-15 per cent can be added by year end.

The fund has a minimum investment of $5,000 and there is an annual charge of 1.5 per cent and initial charge of 5.25 per cent. Volatility is registered at 26.24 per cent, and the fund noticeably saw tough years in 2000 and 2002, producing results of –18.5 per cent –2.6 per cent respectively.

One of the successes of the fund is that it is run out of Hong Kong which means they are in close proximity to the market. Wong and his research team are able to carry out around 150 visits a year to companies which ensures that they have in-depth knowledge of all the movements which may effect the fund’s performance.

Wong feels positive about the Chinese market at present. He says: “China has seen the highest growth rate of any Asian country and companies are still undervalued. There have been positive macro changes in China over the last five years and this has not been reflected in stock prices.”

The fund has seen an increased focus on cyclical markets with the automobile, power and petrochemical sectors all performing well. This is reflected in the fund’s top ten holdings, where there are presently four petrochemical companies. Wong notes that China accounts for one third of the world’s imported oil and gas.

“Our strategy in terms of stock selection is to look for good earnings growth and companies which return good dividend yields. Research, visits to companies and internal discussions are the keys to our strategy. We pay particular attention to whether a company is returning profits to shareholders, which is something Chinese firms have improved on since I have been managing the fund.”

Companies are also monitored to see how they are performing against their sector peers and Wong feels that there has been no need to change the strategy so far this year and doesn’t envisage doing so in the latter half of this year. It is also seen that companies are now far better at disclosing information, which makes investing a lot more simpler.

The fund is also overweight in telecoms, which may be a worry from an outsider’s point of view, but as Wong notes, telecommunications companies in China are still growing. Unlike their European counterparts growth is restricted to 2G developments and so have faced none of the downside of 3G investment.

“The economy and consumer spending in China are still growing. We tend to steer clear of those companies that are producing white goods and some electrical product manufacturers as the prices may be good but the profits are not so high.”

Worries that the Chinese government may be forced to scrap the peg of its currency (the renminbi), to the dollar, do not seem to be a major concern to Wong. “There has been a lot of speculation about this and I think that in the future things will change slightly. However, the government wants a stable environment and so won’t change it by much if it did. There will be no change this year.”

“Seventy per cent of the population live rurally and so agriculture would suffer if the domestic currency appreciated.”

A new government in power in the last two years has also led to speculation as to how it would bring in much needed reforms. However, Wong believes that the way in which it handled the SARS crisis, reporting daily cases of the virus, showed that the government is willing to be open and has led to a growing trust in the leadership.

Although the country faces further issues of high unemployment, a banking sector in need of quick change in terms of transparency and worries over the movement to a free economy, Wong now believes that the market and his fund are large enough to handle any volatile times ahead. “I see economic growth as sustainable in China. Globally there has been more focus on the country and the fund is growing with the market.”

II :: FUND REVIEW - rang a number of IFAs about this fund but they were either unable to comment or had no experience of using this fund.

However, Mark Osland, director at IFAs Fidelius Ltd says: “The Chinese market offers exciting opportunities but the lack of probity in the stock market is a real turn-off. The fund has performed well in recent times, but there are other funds that have done better in its class. [Specifically, Osland mentioned L&G China, an onshore entity]. Generally the fund is ranked in the second to third quartile compared to its sector peers but has performed above the sector median and has been a consistent performer.”

“I am personally looking to invest in China, though I would not invest in a Chinese fund but would go for a Pacific fund that had exposure to the benefits of the growth of the economy.”