Value Partners is set to launch only the second actively managed China A-share RQFII fund in Hong Kong this month despite acknowledging challenges in value-investing in the onshore equity market.
The firm’s China A-Share Select Fund was rubber-stamped by the Securities and Futures Commission (SFC) on September 23, which was six months later than expected.
The fact it is only the city’s second such actively managed fund may have slowed the process. JP Morgan Asset Management launched the first such fund in August, its China A-Share Opportunities Fund.
Value Partners’ investment director Alan Wang said the launch of its product would be in the next two weeks. But he agreed that March would have been a better time to launch since the CSI300 Index was at a five-year trough of 2,100 points then. It has since rebounded 18% and closed at 2,478 points yesterday.
The new fund will have a value style and invest almost exclusively in A-shares, although there is room for allocation to fixed income and cash.
But Wang conceded that there had been issues with value-investing in mainland China, where the market had been driven by momentum-driven retail investors.
“We have learned that traditional value-investing in China is not easy, particularly over the past four years when value stocks were hurt the most,” he said.
This similarity of investment behaviour in China was different to developed markets, where the variety of investors tended to balance out across market cycles, he noted.
But Wang sees China changing slowly. He noted the qualified foreign institutional investor (QFII) and renminbi-denominated QFII schemes had resulted in funds flowing into the A-share market from offshore, meaning “more long-term investors and more fundamental and value-driven” strategies.
When China expanded its RQFII programme in Hong Kong in 2012, inflows from offshore investors drove up the prices of large-cap undervalued stocks in the fourth quarter, he noted.
That process is expected to accelerate when the Shanghai-Hong Kong Stock Connect scheme goes live, tipped for this month, and when MSCI includes China in its influential emerging markets benchmark, which could happen next year.
Breaking down the fund’s value strategy in more detail, Wang said the firm is positive on three areas: A-shares trading at a discount to their H-share equivalents; undervalued A-shares not dual listed in Hong Kong, especially in the food and beverages, utility, health care, consumption and tourism sectors; and companies paying high dividend yields, some as high as 6-7%.
It also favours mid-cap firms that are leaders in their respective industries, while it currently allocates less than 5% to growth enterprise companies. Wang said the firm had found it hard to find small-cap companies with strong fundamentals that met its investment criteria.
The new fund will be made available to retail and institutional investors, and Wang said he was seeing initial interest from European institutions in particular.
Overall Wang leads a team of 11 focused on A-share research, eight of whom are based in the firm’s Shanghai office and the remainder in Hong Kong. He said Value Partners had no plans to expand its A-share investment team at this time
Value Partners received an RQFII licence in August last year and was granted its first quota of Rmb800 million ($130 million) two months later. It received an additional Rmb500 million quota this April.
The firm also runs a QFII fund that is available to institutional investors. It received its QFII licence in August 2012 and received quota of $200 million at the end of July.