Three Gold-Rated China Funds Hit by Heavy Outflows

Bryan
Cheung,
associate
director
for
manager
research
at
Morningstar
says:
“expectations
are
low
with
sustained
selling
pressure,
but
the
valuations
are
attractive.
The
forward
price-to-earnings
ratio
of
China
equities
are
among
the
lowest
versus
the
major
EM
countries,
implying
a
better
return
potential
in
the
longer
term.”

Cheung
now
thinks
investor
confidence
will
take
some
time
to
restore.
“It’s
always
difficult
to
time
the
market’s
inflection
point.
We
think
investors
should

try
to
prepare
rather
than
predict
broad
market
movements,”
he
says.

Despite
outflows,
there
are
highly-rated
funds
that
stick
to
their
investment
disciplines.
Three
of
these
we
highlight
today
are
Schroder
ISF
China
Opportunities,
FSSA
China
Growth
Fund,
and
T.
Rowe
Price
China
Evolution
Equity
Fund.
All
are
Gold-rated,
with
a
superior,
time-tested
investment
process
for
the
medium
to
long
term.

Schroder
ISF
China
Opportunities

Investors
pulled
a
total
of
$168.38
million
from
Schroder
ISF
China
Opportunities,
whose
outflows
in
October
alone
amounted
to
$7.55
million.
Year
to
date,
the
fund
slid
10.5%,
compared
to
the
China
equity
category’s
11.7%
fall.
Both
the
fund
and
the
category
underperformed
the
index’s
5.8%
decline.

Claire
Liang,
senior
manager
research
analyst
at
Morningstar,
thinks
highly
of
the
fund’s
experienced
and
savvy
portfolio
manager,
sizable
supporting
cast,
and
proven
investment
process.
These
qualities
have
underpinned
its
Gold
rating
for
its
cheapest
share
class.
Schroder
ISF
China
Opportunities
is
one
of
the
best
China
equity
propositions
across
Morningstar’s
coverage.

According
to
Liang,
the
Schroders
fund’s
investment
process
focuses
on
quality
growth,
led
by
deputy
head
of
Asia
ex-Japan
equities
Louisa
Lo
and
the
team
of
17
greater
China
analysts.
Liang
thinks
the
investment
process
benefits
from
a
robust
and
clearly
defined
framework,
where
analysts
assess
a
company’s
growth
prospects
by
comparing
its
return
on
invested
capital
and
weighted
average
cost
of
capital.
This
earns
the
strategy
a
High
rating
in
the
Process
pillar.

“Lo
is
pragmatic
with
her
idea
implementation
and
pays
attention
to
companies’
valuations,”
says
Liang.

“While
such
an
approach
results
in
a
higher
portfolio
turnover,
which
typically
sits
at
the
higher
end
of
the
50%-100%
range,
over
the
past
three
years,
Liang
has
seen
Lo
apply
her
valuation
discipline
and
extensive
industry
experience
to
good
effect.

“This
includes
her
pre-emptive
move
on
taking
profit
on
some
overheated
information
technology
names
in
early
2022
prior
to
the
sector’s
downswing,
which
has
helped
the
strategy
navigate
this
year’s
down
market.”

In
the
portfolio,
Alibaba
Group
(09988)
and
Tencent
Holdings
(00700)
each
took
close
of
a
10%
weight.
Meituan
(03690)
came
in
as
the
third
largest
holding
with
a
4.84%
weight.

FSSA
China
Growth
Fund

Gold-rated
FSSA
China
Growth
Fund
faced
outflows
of
$19.72
million
for
October.
So
far
this
year,
outflows
of
$32.6
million
were
recorded
in
the
$2.5
billion
fund.
The
class
I
for
the
fund
returned
negatively
over
the
short
term,
down
14.5%
year
to
date.
This
underperforms
the
category’s
11.7%
and
the
index’s
5.8%.

Morningstar
analysts
think
the
strategy
benefits
from
a
top-notch
portfolio
manager
and
a
tight-knit
and
experienced
investment
team.
The
team
continues
to
sport
a
strong
investment
culture,
one
that
aligns
its
interest
with
investors
and
is
mindful
of
succession
planning.
Analysts
assign
a
High
rating
for
the
People
pillar.

Another
strength
of
this
strategy
is
its
well-structured
and
thorough
bottom-up
research
process,
which
has
delivered

impressive
track
records
across
all
of
Lau’s
Asian
and
Greater
China
equity
mandates
over
the
long
haul.
Earning
the
highest
rating
in
the
Process
pillar,
the
process
seeks
to
identify
high-quality
companies
that
deliver
sustainable
and
predictable
growth
at
reasonable
valuations.
Management
quality
is
of
the
utmost
importance:
the
team
prefers
management
teams
that

act
with
integrity,
have
high
governance
standards,
have
a
demonstrable
track
record
of
allocating
capital
effectively,
and
are
well-aligned
with
minority
shareholders.

The
largest
position
in
the
fund
is
Tencent
Holdings
(00700),
representing
7.3%
of
the
portfolio
Home
appliance
maker
Midea
Group
(000333)
took
5.8%
weight
and
4.85%
of
capital
is
invested
in
China
Merchants
Bank
(03968).

T.
Rowe
Price
China
Evolution
Equity
Fund

T.
Rowe
Price
China
Evolution
Equity
Fund
experienced
outflows
of
$2.8
million
since
the
beginning
of
2023.
In
October,
the
redemption
totaled
$2.0
million.
As
of
the
end
of
October,
the
fund
has
$96
million
under
management.
The
class
Q
for
the
fund
fell
12.4%
year
to
date.
This
underperforms
the
category’s
11.7%
and
the
index’s
5.8%.
Scoring
the
highest
in
all
three
pillars,
the
fund
earns
a
Gold
rating.

Confidence
of
our
analysts
in
the
strategy’s
portfolio
management
drives
a
High
People
Pillar
rating.
The
strategy’s
sensible
investment
philosophy
earns
a
High
Process
Pillar
rating.
This
strategy
skews
toward
smaller,
higher-growth
companies
compared
with
its
average
peer
in
the
category.
Our
analysts
believe
this
strategy
has
consistently
had
a
defensive
tilt
owing
to

its
exposure
to
high-quality
stocks
over
the
past
few
years.
Though
it
may
trail
peers
during
an
economic
boom,
this
orientation
contributes
to
helping
it
weather
periods
of
economic
stress
better.

At
the
end
of
October,
the
fund’s
largest
bet
was
in
online
recruitment
platform
Kanzhun
Ltd,
representing
7.6%
of
total
assets.
Other
top
holdings
include
mall
operator
CR
Mixc
Lifestyle
Service
(01209),
Yangzijiang
Shipbuilding
(BS6),
and
hotel
manager
H
World
(01179).

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