Investment Trust Insider: how to make money from the Chinese downturn

This year, one of the hardest places to make money has been China. The growth of the Chinese economy has been taken for granted for so long that signs of a slowdown are panicking some investors.

The warning signs have been around for a while but they have become more prevalent over the summer. The Chinese government has taken steps to get things moving again – cutting interest rates and reserve requirements for instance, helped by a moderation of the inflation rate. It is likely however that major change is on hold pending the outcome of a pretty radical reshuffle of the top jobs in China at the 18th National Congress.

Even with this year’s well documented problems, what I find surprising is how poor equity returns in China have been for some time; the MSCI China Index has fallen 2% over the past five years.

One fund that has bucked the trend, however, is JP Morgan Chinese . You might know, if you have been following this column for a while, that I favour the JP Morgan fund over Fidelity China Special Situations.

JP Morgan Chinese (JMC) was launched in 1993 and was the first investment trust to focus on the region. The fund is ahead of the MSCI China index over most periods. It has also been extending its lead over the Fidelity fund this year. To date, its net asset value is up 8.7% against 1.5% for Fidelity and 4.5% for the MSCI China index.

You could argue this is not a fair comparison. JMC is a Greater China fund, investing in mainland China, Hong Kong and Taiwan – split about 50%/25%/25%. To match this, the benchmark it uses is the MSCI Golden Dragon.

There are two open-ended funds in the top 10 holdings as its China A share (domestic Chinese) investments are held via the JF China New Generation and JP Morgan China Pioneer funds (China A shares are not represented in either the Golden Dragon Index or MSCI China).

The inclusion of Taiwan in the mix has been a factor in the fund’s outperformance of Fidelity China Special Situations, which is benchmarked to MSCI China.

JMC is a stock-picking fund and is managed by a four-strong team led by Howard Wang and Emerson Yip. The portfolio is reasonably diversified with around 70 holdings and 40% in the top 10. Turnover is higher than I would like, equivalent to the team turning over the portfolio each year. They are overweight China at the expense of Taiwan. There aren’t any significant sector bets relative to the benchmark – the only meaningful one being an underweight to materials.

With the exception of the two unit trusts, the top 10 features many names that crop up in portfolios managed by other investors in the region such as Taiwan Semiconductor, China Mobile and CNOOC.