Aberdeen Asset Management launched its first China A shares fund for institutional investors last month, arguably a less than ideal moment for a deep value manager.
At the time of Luxembourg-domiciled Aberdeen Global-China A Share Equity Fund’s March 16 debut, the A-shares market already had surged 70% over a nine-month stretch, after five years of treading water.
Since then, the rally has continued — supported by economic reform and policy stimulus, but fueled as well by local retail investors’ first passionate embrace of margin trading. In the past five weeks, that cocktail of fundamental and speculative factors has boosted the Shanghai composite index another 27%.
The fund’s net asset value has risen more than 17% since its launch, confirmed a Singapore-based spokeswoman for Aberdeen. That’s a significant gain for a five-week period but already 10 percentage points behind the broader market’s advance.
Even so, Nicholas Yeo, a Hong Kong-based director with Aberdeen and the firm’s head of equities for China and Hong Kong, said Aberdeen’s high governance hurdles and strict focus on bottom-up research might yet find favor this year with overseas investors looking for defensive exposure to China’s market in the midst of its bull run.
In an April 16 interview, Mr. Yeo conceded the decision to launch the fund in March was “not marketing driven.” Instead, planning for an A-shares fund began three or four years ago, and the decision to move ahead came only after a number of thorny operational issues had been worked out.
The structure of the fund allows one-third of its assets to be invested in Chinese companies listed offshore, including Hong Kong-listed H shares as well as the growing number listed on the New York Stock Exchange.
But with Aberdeen drawing a line when it comes to governance standards that rules out investing in companies with shareholding structures that leave investors without voting rights, the money manager won’t invest in high-flying Chinese Internet companies listed on the NYSE such as Alibaba Group Holding Ltd., Mr. Yeo said.
Aberdeen’s fund literature notes that only 700 companies in the roughly 2,000 strong A shares universe are regularly covered by market analysts, with a number of the less well-known firms kept afloat with state-directed loans extended to ensure labor market stability.
Aberdeen, meanwhile, has researched 250 A shares companies, representing roughly 55% of the market’s capitalization.
The firm’s governance and due diligence screens effectively pare that universe down to between 30 and 40 stocks, said Mr. Yeo.
“There are 27 stocks in the fund currently,” with a focus on consumer, health-care and travel-related companies, and another 10 to 13 that could potentially make it into the fund one day, depending on further progress on governance or better valuations, he said.
The fund’s top holdings, with 5% to 5.5% of the portfolio each, include pharmaceutical company Beijing Tongrentang Co. Ltd.; Beijing-based China International Travel Service Corp. Ltd. and Shanghai-based supermarket operator Yonghui Superstores Co.
Investors looking to ride the Chinese market’s high-octane rally now should look elsewhere, said Mr. Yeo.
Instead, Aberdeen’s A-shares fund is designed to offer investors defensive exposure, with a beta roughly 0.6% that of its benchmark, the MSCI China A-shares index, said Mr. Yeo.
The fund’s launch, meanwhile, comes three months before MSCI Inc. — in its annual review of the firm’s benchmark indexes — will face, for a second year in a row, a decision on whether to include an initial 5% slice of the A-shares market in its global and emerging markets indexes.
Last year, lingering concerns among the biggest global managers about their ability to get the quotas required to invest in China as and when they need it, convinced MSCI to put off including A shares in its indexes starting in 2015. Over the past 10 months, however, Chinese regulators have taken a number of steps to further open the country’s domestic markets.
If MSCI does choose to include A shares in its indexes in 2016, then like Aberdeen’s new fund, a large number of global investors will be facing the same dilemma of investing in a market that already has enjoyed a tremendous run.
In that scenario, rather than getting passive, exchange-traded fund exposure to good and bad companies alike listed in Shanghai and Shenzhen, those investors “might want to consider us,” said Mr. Yeo.
