A China fund from Fidelity is beating the crowd. How it plans to keep doing it

Published Sun, Sep 3 20237:28 AM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Fidelity's China Focus Fund is setting up for another year of outperformance, after ranking first last year among China equity funds tracked by Morningstar. With minimal losses of 0.66% for the year as of Aug. 31, the China Focus Fund has held up far better than the China equity category's decline of 9.45% during that time, according to Morningstar. Its benchmark China index has lost 3.82% year-to-date. The China Focus Fund is a "value contrarian strategy," said Catherine Yeung, a Hong Kong-based investment director focused on equities at Fidelity International. In contrast to value investing in developed markets that might focus on a sector such as utilities, she said the strategy in China looks for companies that are good businesses – at a good price. "We go through all sorts of information, speaking to competitors, suppliers, balance sheets, accounting, have there been incidents at factories?" she told CNBC. The China Focus Fund held 80 stocks as of July 31, mostly in Greater China but also some overseas companies that do most of their business in the country, according to a fact sheet. The fund had $3.72 billion in assets under management as of the end of July. "It's more about finding unloved sectors where the market's ignoring these companies because of sentiment or predisposed view, even though these companies are growing," Yeung said. Challenging economic environment "Now China's very, very different, so you have to be very stock specific," she said. Previously, "you could have gotten into a name and it was driven by momentum or consensus of an overarching theme." China's economy once grew at double-digit growth, propelling the country from near-poverty to the second-largest economy in the world in a few decades. In the last few years, growth has slowed off a high base – and as Chinese leaders tackle long-standing problems of debt. This year, the economic rebound from the end of Covid controls hasn't been as strong as many investors had hoped. An accelerating slump in the massive property market has also raised questions about China's longer-term growth. "It's very fashionable or favorable to be underweight on China. But we think there's way too much negative news priced in and sentiment is too bearish," Yeung said. She said clients are asking her about China every day, not necessarily about investing right now but about what is actually happening. "The whole China story is about a resetting of expectations," she said. "We don't think the China thesis is broken." After a dismal few weeks, data out in the last several days show green shoots of an upward trend. The Caixin manufacturing purchasing managers' index rose to 51 in August, back above 50 in expansionary territory after a 49.2 print in July. An independent survey of 1,300 businesses by the China Beige Book in August found that consumer spending bounced back , while hiring picked up in every sector except for property. China has also started to relax more home purchase restrictions in the last few days. But analysts generally expect real estate will need to consolidate as a sector from here. Stock market support Instead of property, Yeung expects more people in China will put more money into the stock market. That's in-line with a slew of policy announcements in recent weeks to support the domestic stock market's development – and comes as China has opened its financial industry to foreign institutions in the last few years. Such changes, however massive, won't happen overnight. China's economy may also simply need more time. Yeung said that in general, it's taken different parts of the world about 15 months to fully recover from Covid lockdowns. "China only reopened in January," she said. Once there are signs of recovery in manufacturing or confidence, she said she expects consumption will likely benefit first. Consumer discretionary is the largest sector within the China Focus Fund's holdings, at about one-fourth of the names. Alibaba and Macau casino operator Galaxy Entertainment Group rank among the fund's top 10 positions. Fidelity also has a dedicated China Consumer Fund, which is down by 8.75% year-to-date, only slightly better than its peers, according to Morningstar. Both of the Fidelity funds have an annual management fee of 1.5%. The ultimate reason Yeung has for buying Chinese stocks now is the price. "If you're of the view that China is going to maintain a key position in the global economy, then now is a good time as any from a valuations perspective," she said.