Using the Lipper Leaders scoring system to analyze the best performing funds in the IA China/Greater China sector.

Spoiler alert: if you’re skeptical over the outlook for Chinese funds, this article isn’t likely to change your mind.

China was one of the best performing fund sectors in 2020, and Chinese small caps topped the chart. But it’s been a grim period for Chinese equities, with average declines of 23% over the 12 months to the end of April.

Chinese economic data released in May shows little sign of a rebound any time soon, as surprises were to the downside on an already gloomy outlook: industrial output has contracted by 2.9% over the year; retail sales dropped by more than 11% year-on-year, while new bank lending registered its lowest monthly rise since December 2017. Export growth slowed as unemployment rose, with COVID lockdowns taking their toll.

Searching for the silver lining, COVID cases are falling sharply, giving hope that the economy will revive—at least to some degree.

For good or ill, however, China remains crucial to the world economy. Investing in China is a play on global growth, with the two thoroughly intertwined. That’s not easy to unpack. “Deglobalisation” doesn’t have quite the same ring as globalization, nor is it as straightforward. The move to the latter over recent decades was motivated by developed market countries and businesses want of cheaper inputs—not least labor—and so expanded margins.

The disruption caused to global supply chains by, for example, China’s zero COVID policy have exposed the limits to this. But what’s the alternative? Businesses accept lower margins, or expect employees in newly “near-sourced” operations to accept the wages of a Foxconn plant in Zhengzhou (reported as US$314 a month in 2019)? I’m going to go out on a limb here and venture that the cats won’t go back into the bag, those worms will remain de-canned. After all, what’s the alternative?

Global emerging markets are increasingly the world’s workshop. While we may see a diversification from China within them, there’s been an increasing correlation between GEMs and China over the past few years.

This disruption has caused a sea change in fund market leadership over past months: while we calculate a positive correlation between funds’ returns of 0.44—significant, if not high—that changes to a negative correlation of -0.54 between three-month and three-year returns, to the end of April.

Passives on Top

Perhaps more surprisingly, the four top-performing funds over the past 12 months are ETFs—passives lead the pack. All four are represented in the table below.

The top performer over three years is the Allianz China A-Shares fund, with a return of 56%. While it’s nursing losses of 18.3% over the year, that beats the sector average loss of 23.5%. No losses over the period are less than 12%, and it’s the ETFs that have come out of this period best.

Strategically, exposure to China is hard to avoid. If nothing else, as argued above, what is the alternative? Ultimately, equities are about exposure to growth, and much of it will have to come from China. But “ultimately” can take a long time to come during a period where the risks to the downside are coming thick and fast.

What seems likely is that the white-knuckle ride that investors in China have endured over the past year and more still have further to run. In the year of the tiger, the mauling isn’t over.

Table 1: Top-Performing China/Greater China Funds Over Three Years (with a minimum five-year history)

(Click on image to enlarge)

All data as of April 30, 2022; Calculations in GBP

Source: Refinitiv Lipper