Investment trusts on the London Stock Exchange have around £15bn of exposure to Greater China after the regulatory crackdown this week.
There are 69 investment trusts with a portion of their assets held in China, Hong Kong and Taiwan, led by three China specialists: Fidelity China Special Situations, Baillie Gifford China Growth and JPMorgan China Growth & Income.
Many of the trusts focused on Asia and emerging markets have extremely chunky Greater China positions.
|Investment trust||Weighting to Greater China (%)|
|Fidelity China Special Situations||100.00|
|Baillie Gifford China Growth||99.00|
|JPMorgan China Growth & Income||99.70|
|JPMorgan Asia Growth & Income||63.20|
|Invesco (NYSE:IVZ) Asia||59.94|
|JPMorgan Global Emerging Markets Income||56.60|
|Henderson Far East Income||49.80|
|JPMorgan Emerging Markets||49.30|
|Schroder Asian Total Return||47.32|
|Aberdeen New Dawn||47.24|
|Templeton Emerging Markets||45.30|
|Schroder Oriental Income||43.94|
|Fidelity Asian Values||39.24|
|Manchester & London||37.02|
|Aberdeen Asian Income||35.37|
|Aberdeen Standard Asia Focus||24.29|
|Scottish Oriental Smaller Companies||21.59|
|Fundsmith Emerging Equities||21.03|
There are 24 London-listed investment companies holding at least a fifth of their portfolio in Greater China, according to an analysis of Morningstar data.
At the start of the week the clampdown on Tencent led to its shares tumbling and the shockwaves rolling around the world stock markets, with shares in many of the most China-exposed investment trusts seeing sharp declines.
This was not surprising with the data showing that 20 investment trusts hold stakes in Tencent, seven of which have at least 7% portfolio weightings to the digital media giant, led by JPMorgan China Growth & Income PLC’s 8.8%, Manchester & London Investment Trust plc (LSE:MNL)’s 8.7% and Asia Dragon Trust PLC’s 8.2%.
The largest by value of these holdings was held by Scottish Mortgage Trust at a whopping £1.3bn, roughly, based on a calculation of the weighting and the net assets of the fund, followed by £212.5mln for Templeton Emerging Markets, £156.8mln for Fidelity China Special Situations and £118.5mln for JPMorgan Emerging Markets.
In total there is around £2.1bn of Tencent held in London investment trusts.
Later on Monday, Beijing’s regulatory guns swung round to Meituan with new reforms for digital food delivery platforms.
The local services rising star is held by eight investment trusts, led by a 3.7% weighting at Scottish Mortgage Investment Trust PLC (LSE:SMT) worth around £715mln, followed by 1.5 or £51mln for the Monks Investment Trust (AIM:MNKS) and 3.5% or £18mln for JPMorgan China Growth.
Scottish Mortgage's third largest holding is Pinduoduo, at 1.3% of the portfolio or around £366mln.
As the largest investment trust in London and a FTSE 100 constituent, it's not that surprising that the Baillie Gifford-managed fund has the three largest individual stakes in Chinese companies.
Fourth is Templeton Emerging Markets's 8.6% weighting to Alibaba, worth around £229mln, followed by its stake in Tencent.
I asked one of the regionally focused trusts to give their thoughts on whether China remained an attractive investment markets.
Pruksa Iamthongthong and Adrian Lim, Abrdn’s co-managers of Asia Dragon Trust PLC, said: “We remain constructive on the long term prospects for Chinese equities. Despite the events of the past week, we believe the private sector retains a critical role in ensuring that the Chinese economy continues to innovate and prosper and that China reaches its goal of being a moderately prosperous nation by 2035. China still needs well-functioning capital markets to help propel growth. Companies that can adapt to emerging regulatory frameworks and align with policy objectives such as digital innovation, green technology, access to affordable healthcare and improved livelihoods will continue to have a bright outlook.
“As per China’s 14th 5-year plan, innovation remains a key policy priority. Ensuring innovation is able to continue and thrive requires a balanced approach to regulation and we expect a good balance to be struck between promoting innovation and achieving regulatory purpose. More broadly, actions against sectors like technology carry some risks: go too far and they could damage business confidence, but failing to address anti-competitive practices could also hold back business innovation and dynamism.
“While regulations may appear swiftly enforced or even heavy handed, they do need to be seen in the context. China has moved swiftly up the innovation curve but, as has been in the case in other countries, regulation has failed to keep pace. Our view is that Chinese regulators are effectively playing catch-up with the considerable innovation that has taken place in these sectors like technology in recent years. A broad heavy handed clampdown on private new economy sectors seems unlikely, given their importance in underpinning China’s economic vision for a modern productive, consumption led economy.
“In terms of navigating regulatory developments, ESG analysis is critical. At the most broad level, Government policy objectives focus on areas like social stability, economic stability, financial stability and national security. Within these broader policy objectives, more granular objectives have emerged and have been expressed in the regulatory developments. This includes access to: education, low cost healthcare, housing and a good livelihood. Regulations that aim to protect client data and privacy, tackle monopolistic practices, lower costs of basic goods, and ensure basic labour rights are aspects that we consider when researching companies through an ESG lens. Companies that do not understand or address these risks will have a weakened investment case, while the opposite is true for those that do understand and address these risks.
“For our two large holdings in the internet sector, Alibaba and Tencent, we continue to see good alignment to the government’s interests in digitalising the economy and bringing costs down for consumers. However, the intervention in the education sector may be seen as a line in the sand moment, increasing the risk for any sectors that fall foul of domestic consumer interests or policy.
“Looking forward we will remain watchful of regulatory developments and the risks and opportunities that emerge. It is clear that regulatory focus will continue in areas such the internet, education, real estate and healthcare sectors. This does not necessarily mean avoiding these sectors, as it pays to be selective and also take advantage of mispricing opportunities, as investors have indiscriminately sold off the broader market and extrapolated potential effects unnecessarily, in our view.
“In our portfolios we have a preference for high quality companies that have a strong link to consumption, particularly domestic consumption. This sector has a reasonable alignment with the strategic aims of Chinese authorities and as a consequence should be better positioned to withstand regulatory headwinds, and also continue to prosper.”