Emma Wall: Hello, and welcome to the Morningstar series 'Why Should I Invest with you?' I am Emma Wall and here with me today is Charlie Awdry, Manager of the Henderson China Opportunities Fund. Hi, Charlie.
Charlie Awdry: Hi, Emma.
Wall: So, usually you have between 50 and 60 stocks in the fund. But at the moment you are slightly below that, why is that?
Awdry: Yeah, we've been running around 45 – at the moment we're 47 and it's really a reflection of the more difficult economic circumstances in China. Really fewer companies are excelling in this environment and so we are really focusing on the very best. So, in some industries where we would have owned two operators, we now just own the best.
Wall: And this might change though this month because there is some regulation coming which should open the sort of sphere of investible options?
Awdry: Yes. So, we have a Connect, the mutual market access between Hong Kong and Shanghai and what this means is that foreign investors will have easier access to Shanghai. So, we are all accelerating our research into mainland companies and yeah, I think over the next few months you will see some more stocks in the fund because there are some actually quite interesting unique investment opportunities there.
Wall: And one of the questions perhaps investors might have is about corporate governance. So, the Hong Kong market obviously used to be U.K. owned and with that that comes a more western-style stringent governance. Investing in Shanghai, are there more sort of opportunities to be caught out?
Awdry: It's certainly different. I would say one of the things that investors like about Hong Kong, as you said, is the old British rule, which actually gives I would say fairer law courts. In China, of course, the Communist Party is above everything. So, they could control the law courts. So, I think investors will feel more comfortable about being able to have redress in corporate governance issues in Hong Kong.
In Shanghai, that's something that we will have to get more comfortable with. But from our point of view, what it means is that we really elevate the assessment of quality and shareholder friendliness in our picks in that market. Having travelled a lot in China and met a lot of these Shanghai companies I would say the range of corporate governance is significantly broader than in Hong Kong. There are the very best and there are a lot of poor ones. So, again, you have to be very selective.
Wall: Looking at the companies that are going to be coming to the fore for you guys, what kind of sectors is it? I mean, what's the market made up of?
Awdry: Well, in Shanghai, it's slightly different in that they have a lot of more industrial side, but they also have a very long history of healthcare companies and healthcare is something that we've been investing in a lot in Hong Kong and we expect to do it in Shanghai as well.
The healthcare sector for us is really attractive in China really because of demographics, you have a lot of aging people, they are also richer and the government is putting more plans through for insurers and healthcare insurers. So, expenditure and budgets on healthcare are growing. So, the long-term outlook for that sector is pretty good. So, that's certainly one area where we have invested in Hong Kong and we'll be looking in Shanghai as well.
Wall: You mentioned at the beginning one of the reasons why you are low on stocks at the moment is that macro outlook is not so great. Over the summer we had some disappointing figures for GDP. How is that affecting your choices?
Awdry: Well, I'd say generally speaking there are sort of two elements to the portfolio. There is an element that is the best companies that can deliver almost whatever the economy, so slightly less cyclical. And that's either because they a noncyclical business in China or they have a secular driver or they are international businesses. So, examples will be Tencent, which is an internet business; AIA, which is life insurance; or even Lenovo, which has a strong domestic PC position in China and is taking market share internationally.
And then the other part of the portfolio is more economically sensitive areas. Areas like financials, areas like industrials, which tend to trade more with macro data. So, I think what you are referring to maybe is the August PMI number was a little bit weaker. And yes, we have that rally through the middle of the year and that tends to be when those financials and more sensitive stocks have gone up. So, I would say that sort of seems to how the different part of the portfolio than the more structural drivers which make up the vast majority of the fund.
Wall: And so, perhaps it's about tweaking as you get more information?
Awdry: Yeah. Yeah. I mean, the pickup in the economy that we had this year started in about May time. What we had in 2012 and 2013 is it started in September. So, really we've actually had an acceleration earlier in the year and so we are watching what happens from here and I think a lot of it depends on the property sector.
Wall: Charlie, thank you very much.
Awdry: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
