Shumin Huang joined J.P. Morgan Asset Management in 2006 after eight years at Goldman Sachs covering industrial and cyclical sectors in the Greater China markets. She currently manages $5 billion. This includes JF China New Generation, which tracks companies with businesses that will benefit from domestic consumption in the country; JF China Pioneer A-share, a primarily A-share focused fund; and JF China (USD), which looks at China’s energy companies and banks. We talked to her about her investment outlook.
What is the benefit of investing in China-focused funds?
China is the second-largest economy globally but its equity markets, when looked at as a percentage of gross domestic product, are still much lower than other countries. This suggests a significant growth potential for China funds.
There are currently so many China-focused funds out there, how do you differentiate yours?
I think our team has a differentiated advantage on the close working relationship between our regional portfolio managers, country portfolio managers and the investment team in our China JV [China International Fund Management] in Shanghai. We conduct regular and timely discussions on the impact of global and regional events, commodities, China’s macro and industrial policies as well as the supply chains of various industries. As such, we gather different perspectives to identify the market-driven issues and facilitate our investment decisions ahead of our competitors. While we may take advantage of the market volatility to add or trim positions, we focus on the fundamental values and longer-term sustainable returns of our investments. Meanwhile, we are always mindful of the risk profile and liquidity constraints for our portfolios.
Which sectors will likely generate good returns in the coming years?
We have identified three key investment themes with a focus on fundamental values and earnings sustainability.
One theme is to look at consumption-related companies that have a compelling business model and strong execution that enables them to deliver sustainable growth. A second theme is to look at beneficiaries of industry upgrading or consolidation on the back of an improving product mix or stronger pricing power. The third theme is to pick selective cyclical stocks that offer an attractive risk and reward profile, such as those policy-constrained sectors largely undervalued relative to fundamentals due to the overhang of negative news flows.
We overweight consumer stocks, especially those with pricing power and beneficiaries of the rebalancing of China’s growth. Many of the consumer-discretionary stocks that we own have reported above-consensus same-store-sales growth and are experiencing earnings upgrades. Our major underweight remains in the telecommunications sector, where we are unable to find many attractively valued stocks with good growth opportunities.
Do you have any special preferences?
I have a preference for those companies with a sustainable, profitable business model, such as high-entry barriers, strong pricing power, and incentivised management, which are the keys to being longer-term winners with sustainable returns.
Have you made any significant changes in your portfolio recently?
We have added exposure to Chinese banking and property sectors in the past few months because China is probably at the late stage of the tightening cycle given that sequential month-on-month consumer price index pressure has eased and given the growth of China’s broad money supply, which is already at the targeted level of 16% year-on-year. Most property stocks in our portfolios command significant discounts to net-asset-value [NAV], and we believe that there is potential for those discounts to narrow as well as for the NAVs to be revised upwards.
We have also accumulated some of our core holdings in the consumption space during the consolidation in the past few months.
China’s A-share index performed poorly in 2010. How did you minimise losses?
Given the high participation of retail investors, A-share markets are generally much more news- or momentum-driven, with high volatility. However, there has been a rising correlation of earnings growth and share-price appreciation except for those sectors facing policy headwinds.
We had an overweight position in those consumption-related stocks that we believe would benefit from the re-balancing of China’s economic growth. As such, our A-share funds outperformed against their respective benchmark in 2010. Despite the market volatility, our approach to focus on the longer-term winners and valuation gaps has worked well.
What is your outlook for Chinese equities this year?
After underperforming in 2010 and early 2011, MSCI China commands lower multiples than most of the other markets, and we believe that looks favourable for Chinese equities as China is probably at the late stage of the tightening cycle with the risks associated with inflation and monetary tightening well discounted in the markets.
Do you have plans to launch new funds in the near future?
We continually seek to enhance the range of strategies that we offer to meet the increasingly sophisticated investment requirements of our clients.
This is achieved by launching new products and employing our investment expertise to shape existing products appropriately. We try to offer a comprehensive palette of investment solutions providing consistently high-quality fund management services.
This story was first published in the May 2011 issue of FinanceAsia magazine
