JPMorgan Chinese beat its new benchmark over the six months ended 31 March 2016 – generating a return on net assets of 6.8% against 6.2% of for MSCI China (from 26 January) and MSCI Golden Dragon (before 26 January). Had they stuck to the MSCI Golden Dragon Index though, the fund would have underperformed (the six month return on the Golden Dragon index was 8.4%). The return to shareholders over the period was 10.5% as the discount narrowed.
The manager’s report says stock selection in technology contributed to performance. Select positions in upstream semiconductor companies, such as Silicon Motion Technology and Taiwan Semiconductors Manufacturing, outperformed. They believe they should benefit from their product cycles and inventory restocking, driven by demand growth from a low base. An overweight position in AAC Technologies also helped returns as it is well-positioned among the Apple supply chain space, with an increasingly diverse component product portfolio, such as acoustics, haptics and connectivity, and, as a result, a growing addressable market. Other top contributors were more mixed for the period. The pair trade in the telecommunications sector, overweight China Telecom and underweight China Mobile, paid off, as the former reported better fourth quarter results than peers and guided positively, while the latter missed earnings. Their top pick in the internet space, Tencent, continued to consistently outperform, thanks to solid profit growth, and should have further runway to monetize its diversified book of business. Secular growth names with exposure to consumption upgrades, Regina Miracle (the textile maker) and IMAX China (cinematic technology provider) that were initiated in the fourth quarter of 2015, also worked well. As the oil price rebounded to nearly USD40 per barrel by the end of March from its January low, our overweight position in CNOOC added value. The exploration and production company is backed by a sound balance sheet and should benefit as crude price normalizes.
Overweight positions in life insurers, including China Taiping Insurance and Ping An Insurance, were among the top detractors, as they fell with the market due to their leverage to cyclicality and equity market volatility. Despite some near term weakness, however, their fundamental theses remain intact. Within healthcare, our overweight positions in Phoenix Healthcare (hospital operator) and Sino Biopharm (integrated pharmaceutical) detracted, driven by both stock specific reasons rather than broader industry headwinds. For the former, a delay in its Baoding acquisition and heightened political risk in a heavily regulated industry increased near term earnings risk. However, they still believe in the long term investment case given the need for reform for Chinese hospitals. The latter, while one of the top performers in 2015, struggled with a few headwinds so far this year. Our environmental protection stocks also struggled during the quarter, namely China Longyuan Power and China Everbright International. China Longyuan Power sold off on tariff cuts putting downward earnings pressure on wind power. Additionally, the volatility earlier this year in the domestic onshore market was a drag on the performance for some of our A-share holdings. Positions in companies such as Spring Airlines (low cost carrier), China South Publishing (provincial education materials producer) and Beijing Originwater Technology (leader in waste water treatment) all detracted from performance.
JMC : JPMorgan Chinese boosted by discount narrowing