Can China's Economy Navigate Today's Troubled Waters?
The Clough China Fund
The Clough China Fund – Class A (CHNAX) was launched on December 2005. As of January 2016, fund’s net assets stood at $56.1 million and the fund had a net expense ratio of 1.95%. The fund benchmarks its performance to MSCI China Index.
Performance evaluation
Chinese stocks had a volatile year in 2015. International investors remained skeptical about the macroeconomic scenario as China’s growth continued to weaken gradually and monthly indicators of fixed asset investments, industrial production, and global trade did not show any sign of improvement. Deflationary pressures persist given weak growth both domestically and abroad, as well as and excessive industrial capacity.
The Clough China Fund – Class A (CHNAX) rose marginally by 0.2% in December 2015 from a month prior. In the fourth quarter ended December 31, the fund was up by 2.2%. In the one-year period, it was down by 9.7%. Year-to-date (from the end of December 2015 to February 26), CHNAX was down by 12.8%.
Portfolio composition
As of December 2015, financials dominated the portfolio with 29.8% weight followed by consumer discretionary sector with 22.5% weight. Information technology and telecommunication services made up 17.0% and 15.3%, respectively, of the total portfolio weight. Meanwhile, the fund has no exposure to the healthcare and materials sectors.
The fund holds in all 58 holdings as of December 2015. Top ten holdings comprise up 47.9% of the total portfolio assets and include Tencent Holdings (TECHY), China Mobile (CHL), and Alibaba Group Holdings (BABA). Other equity holdings include Baidu (BIDU) and NetEase (NTES).
In 2015, Tencent Holdings was the biggest contributor to the performance of the CHNAX. Tencent is expanding into mobile payments, and its powerful ecosystem continues to expand via cooperation with strategic partners.
Meanwhile, CNOOC Limited (CEO) was the biggest detractor and adversely hit by falling oil prices. The stock was sold off at the end of August and is no longer in the portfolio.
Reasons to invest in CHNAX
The fund is heavily invested in the financials, consumer discretionary, and information technology sectors, which are expected to do well due to the following reasons:
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the introduction of various financial reforms by the Chinese Central Bank to support the banking system
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China is aggressively shifting its focus to consumption driven economy, which would result in a rise in domestic consumption. There has been a drastic increase in leisure and entertainment spending. China is expected to become the world’s largest movie market by 2017, overtaking the massive US market in box office revenues.
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The information technology sector in China is expected to do well, due to the spectacular rise of e-commerce. Online gaming, messaging services, and online-to-offline (O2O) transactions are being driven by the rapid buildout and deployment of 4G mobile data networks.
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The fund has low exposure to the industrial sector, which is struggling due to overcapacity, deflationary pressure, and weak demand.