UK-based fund house M&G Investments has admitted that concerns over corporate governance standards in China has deterred it from investing directly in the country's equity market.
In London, Ashmore, BlackRock and HSBC have received renminbi-denominated qualified institutional investor licences to allow them to access China's onshore securities market directly after the city was handed a quota of Rmb80 billion ($13 billion) in October last year, as reported.
As one of the UK's largest fund houses with £248 billion ($416 billion) of assets under management as of the end of June, M&G might have been expected to follow suit.
But Randeep Somel, fund manager for the group’s £3 billion global basics fund, told AsianInvestor that firms in China and other emerging markets tended to be inward-looking, focus on their domestic markets, sideline minority shareholders and lack accounting conventions.
Somel recalled going to a recent presentation by a Chinese bank.
“While I was never going to buy it, I thought it would be interesting to hear what they say,” he said. “An investor puts his hand up and asked the management: 'What do you think your lending rate growth will be this year?' The CEO replied: 'Whatever the government tells us.'
“The bank is a listed entity, but is he running it for the shareholders? I don’t think so.”
Former Fidelity fund manager Anthony Bolton learned a lesson about corporate governance in China after he bought into Chinese forestry group Sino-Forest. The group's share price tanked after Muddy Waters suggested in a report in June 2011 that the Chinese firm had inflated its sales figures. Sino-Forest was subsequently delisted in May 2012.
On his last day heading Fidelity’s China special situations fund earlier this year, Bolton expressed frustration over issues such as false auditing figures in Chinese companies.
Still, Somel remains bullish on the broader growth prospects for China and other emerging markets. Like many fund managers, he believes in the country’s macro picture, given that it is the world’s second largest economy, is expanding at 7.5% per year and has a burgeoning middle class.
He prefers to access China’s growth story through global companies, which he said have greater corporate transparency. This strategy also helps M&G to diversify risk given that such firms do not rely solely on revenue from a single country, Somel added.
He cited the example of German luxury carmaker BMW. In the first half of this year it sold just over 50% of the 428,290 cars it produced to customers in China, according to BMW’s latest results.
Driven predominantly by Asia, total sales during the second quarter rose 8% sequentially to 458,088 vehicles, with sales in China rising by almost a quarter.
“You ask any chief executive where they are investing right now, it’s very simply emerging markets. Not just India, Brazil, Russia and China, but also Vietnam, Argentina or Nigeria,” Somel said.
However, he does not discount investing in Chinese companies in future. He pointed to Alibaba, the Chinese e-commerce firm that is expected to list in New York soon, as one of the few most competitive companies in China.
“It’s a good company and it has the security of a domestic market and a growing distribution and scale. It has skipped the bricks-and-mortar step and is going directly to an Amazon-esque model, which is a lot cheaper to build,” he said.
“We will certainly be taking a look at it. I suspect we will be waiting for a couple of quarters and meet the managers before we invest,” he added
Somel's global basic fund, which invests in primary and secondary industries around the world, has returned -1.2% measured in British pounds, and 10.2% in US dollar terms, in the year to June 30.