China is slowing down but riches can still be made

ALTHOUGH China’s economy grew at its lowest rate for 28 years in 2018, fund manager Andrew Graham remains phlegmatic about its slowing down. Graham, manager of Martin Currie Asia Unconstrained Trust, believes there remain plenty of opportunities for an astute investor such as himself to make strong, long-term returns for shareholders. The key, he says, is to focus on the sectors of the economy that will continue to flourish.

He says: ‘China is in transition. It is no longer the low-cost manufacturer of the world. It is now an economy focused more on serving internal consumer demand and doing business with its Asian hinterland than being the world’s economic engine.’

These changes, he adds, will put more emphasis on both technology and environmental conservation, while fuelling growth in financial services industries to meet the money needs of the population. These are the areas, he says, that he will concentrate on as an investor.

The trust is currently more than 40 per cent invested in Chinese businesses, either through shares listed in China or Hong Kong. The biggest holding is a 7.4 per cent stake in internet giant Tencent. Other key China positions include insurer AIA and clean energy distributor ENN Energy Holdings. He is also currently running the rule over financial services group Ping An Insurance.

Graham says: ‘We are looking for companies that can generate a strong return on capital – that is big profits – over a sustained period of time. There are some 400 companies on our radar, but we tend to invest in no more than 30 at any stage.’

Currently, the trust has 27 holdings, giving it geographic spread across most of Asia apart from Japan where it does not invest. The trust’s performance record is more than respectable. Over the past three years, it has generated overall returns of 69 per cent although like all Asia funds it has been hit by market fallout from the trade war simmering between China and the United States.

Unlike many rival funds, the trust has a couple of unusual bents. First, part of its objective is to deliver a growing income, even if some of the dividend payments made half-yearly to shareholders are funded out of capital returns.

Graham says: ‘The trust has a dividend yield of 4.5 per cent but the portfolio’s underlying yield is 2.6 per cent. The difference is funded out of capital. It is a policy that is proving popular with shareholders who like a regular income.’

Secondly, the trust’s board asks shareholders every three years to vote on whether it should continue or be wound up. This policy keeps Graham and his deputy Damian Taylor (ex- Goldman Sachs) firmly on their toes. The next vote is in July 2021.

The trust’s ongoing charge is 1.1 per cent and the shares currently stand at an 11 per cent discount to the value of the underlying assets – attractive to those who believe the discount could narrow in the future in response to positive news such as China and the United States resolving their trade issues.

Martin Currie is part of American fund manager Legg Mason, but is run out of Edinburgh as an independent investment operation.

Given the trust’s exposure to China, it should only be considered by those who are prepared to ride out any shortterm stock market setbacks and invest for the long term. It should represent no more than 5 per cent of any well-balanced investment portfolio.