Gigi Chan’s responsibilities include membership of the firm’s oil-and-gas and consumer products global sector research teams, country research responsibilities for China and Hong Kong, and management of other Asian equity funds. She graduated from St Hilda’s College, Oxford, with an honours degree in politics, philosophy and economics, holds a post-graduate diploma in law from the London College of Law and is a CFA charterholder. Chan joined Threadneedle in 2000.
What features would you like to highlight about the fund?
Our China Opportunities Fund recently passed the fifth anniversary of its launch. The fund has a smaller and medium-sized company focus, and has out-performed its benchmark (MSCI China) over three and five years. The fund is called China Opportunities because we want to invest in companies that can leverage off the growth opportunities that China offers. We don’t mind which exchange a stock is listed on; in practice most are listed in Hong Kong, with some stocks that are domestic A-share listed as well as US listed. Our investors span a broad range from individuals to institutional investors. The fund’s assets under management were $100.3 million as at the end of March 2012. Overall, Threadneedle’s Global Emerging Markets team manages $7.7 billion, of which $4.7 billion is in Asian Equities. The firm’s total assets under management were $123 billion at March 31, 2012.
What is your investment philosophy and process?
We take a thematic approach to stock picking: by that we mean we try to identify areas where we see superior growth and where we see investment opportunities coming from structural changes. Then once we identify these areas, we will try to find the best of the best ideas within those areas to play out these themes. We want to identify companies along a value chain that are actually generating the most value. In order to achieve this, we place a lot of importance on company meetings — not only so we are better placed to make qualitative assessments on them, but also to gain better market intelligence into their respective industries. To this end we will not just meet companies that we make investments in — we will also meet their industry peers, their suppliers and their customers. And after the process of identifying good companies, valuations are also important.
There is a price for everything, and we will wait for better entry points if good companies are trading expensively.
And your investment style?
Our approach has been to stick with our selections through cycles and this remains the same going forward. Thematically we continue to favour higher quality companies with good long-term growth characteristics. We particularly like companies with strong balance sheets and robust cash flows, as they are less reliant on economic conditions and will be able to finance their own growth through credit cycles.
What are the major themes that you have identified in the Chinese market?
Broadly, they can be described as “trading up”, “automation” and the “digital superhighway”. As income levels have risen, there has been a lot of trading-up in the consumer space due to aspirational buying. This is not just at the high end; low-end consumers are moving from non-branded to branded goods, and mid-end consumers are moving to the higher end. So this gives retailers across the board more scope to cater for changing consumption patterns.
Meanwhile, automation is increasing in businesses as wages increase and companies seek to enhance productivity. And finally, China has become a fast adopter of online technologies and this — the digital superhighway — is a vibrant area where we see lots of well-run companies that are cash generative and are market share gainers in growing markets.
What are the best opportunities now?
Now that liquidity and risk appetite have normalised, investors are returning to look for growth and this is the perfect environment for stock-pickers.
What are your main concerns about the structural outlook for China?
China is in a period of transition as the authorities try to re-orientate the economy from one that is investment led to one that is more consumption driven. The focus will be on improving the quality of growth, which is really positive in the long run.
However, this could mean short-term pain for long-term gain.
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How worried are you about governance and fraud issues with Chinese companies?
We believe that you always need to do sufficient due diligence with every company, Chinese or otherwise, and it’s important to do qualitative and quantitative risk assessments with every investment we make. With some Chinese companies that have less sell-side coverage, more legwork is required to get more information about them, and to cross-reference them with other companies within their industry to get a better idea how they are doing.
What is the immediate outlook for Chinese equities?
We think that the concerns about instability in Europe have increased worries about risk across the board, and the knee-jerk reaction has been to sell Chinese equities, which are perceived to be a riskier asset class. However, longer-term, China benefits from solid structural growth fundamentals and we believe that investors will always return to look for investment opportunities in the region when risk appetite normalises and people focus on growth and fundamentals again.
