Ad Feature by Baillie Gifford
The value of any investment can fall as well as rise and investors may not get back the amount invested.
China has long held great opportunities for investors but also presented a need to navigate its higher risks and volatility as an emerging market – and its different political culture.
Heightened geopolitical tension has dampened relations between China and the West. Chinese authorities are also dealing with a stuttering economy and ongoing problems from the Covid-19 pandemic, so many investors may decide the time isn’t right to invest.
But shunning China means passing up on the combined promise of its disruptive growth companies and business and consumer market, says Baillie Gifford China Growth Trust joint-manager Sophie Earnshaw.
She argues that investing in a selection of the best Chinese growth companies, with fund managers who know them in detail, presents a way to profit from the country’s advanced technology and its rapidly developing consumer economy. Baillie Gifford China Growth Trust joint manager Sophie Earnshaw looks for 40 to 80 of the country’s best growth companies to invest in ‘China is the most important country to get right in people’s portfolios in the next few decades’, says Earnshaw.
‘It offers unparalleled opportunities to growth investors, not just in an emerging markets context but in a global context.
‘If you’re not investing in growth companies in China, you’re missing the point. It is one the most exciting opportunities for growth investors.’
Baillie Gifford China Growth Trust invests in 40 to 80 companies that Earnshaw and joint manager Roderick Snell see as having the ability to develop.
She says: ‘We mean those companies that can at least double the size of their business and share price on a five-year view.
‘Our investment philosophy, long-term growth and active investing are ideally suited to the Chinese market. One of the main reasons is that China in aggregate is a very short-term market, where trading volumes are 80 per cent dominated by retail investors who typically only hold stocks for months rather than years.
‘Our long-term philosophy is a real differentiator there.’
But in a market where pitfalls abound, the managers do not just look for the promise of high growth, they also pay keen attention to the robustness of balance sheets and corporate governance.
Earnshaw says that while the opportunity for growth is great, people should view China as a higher risk part of their broader investment portfolio.
‘This is a volatile market with drawdowns of 20 per cent, 30 per cent or even 40 per cent not uncommon over shorter time periods. As such, it is also important to make sure one can invest with at least a 5 year, and ideally a 10 year, time commitment.’
She believes it is also important to consider the role of the Chinese state and to go with a fund or trust that has an active investing philosophy – and doesn’t simply follow the index.
Spreading risk across a selection of different companies in different industries is important for the trust for managing potential volatility, but Earnshaw says China is a stock market where trying to diversify simply by following the index doesn’t work.
‘There’s a huge amount of the index that you’d want to avoid’, she says. ‘That’s why a relatively concentrated portfolio is the way to go.
‘The index still has a lot of exposure to no-growth industries, for example, the utility space, increasingly the property sector, and a huge chunk of the banking sector.‘A lot of the index is dominated by state-owned enterprises and these types of companies are typically not managed in the interests of minority shareholders.’ BAILLIE GIFFORD CHINA GROWTH TRUST TOP 10 HOLDINGS 1. Tencent 8.6 2. Alibaba 6.2 3. ByteDance 5.4 4. Kweichow Moutai 4.2 5. China Merchants Bank 3.9 6. Ping An Insurance 3.9 7. CATL 3.6 8. Li Ning 3.0 9. Meituan 2.9 10. JD.com 2.3 Earnshaw says that there is ‘a huge array of exciting growth opportunities in China’ and flags its rapidly improving renewables, technology, and engineering sectors.Among the companies in the investment trust’s top 10 holdings are some names that will be familiar to many UK-based investors.Tencent, Alibaba and ByteDance are global leaders in the digital world. Tencent and Alibaba have taken social messaging, gaming and marketplace and turned them into an integral part of China’s digital economy, from online payments to cloud computing. Most investors will also be familiar with ByteDance’s viral video social media platform, TikTok.This trio of big names is an example of how China’s economy has shifted, with the state pushing for it to […]
source ‘If you’re not investing in growth companies in China, you’re missing the point’: Baillie Gifford investment manager Sophie Earnshaw on what investors need to know