Holly Black: Welcome to the Morningstar series, "Why Should I Invest With You?" I'm Holly Black. With me in the studio today is David Raper. He works on the Comgest Growth China Fund.
Welcome.
David Raper: Thank you very much. Very good to be here.
Black: So, what does the fund do?
Raper: We're an equity fund, first and foremost. Like all Comgest funds, we invest in long-term quality growth. So, what does that mean day-to-day? That means we're trying to find companies with really structurally strong positions in the market and structurally strong long-term opportunities in front of them. And when we find them at appropriate valuations, we buy them. It's not rocket science, but if we do it well, if we do it consistently, then it delivers above-average returns from above-average earnings growth. At the end of the day, that's it in a nutshell.
Black: So, I suppose investing in China, we can't really avoid talking about the trade wars that's going on at the moment. How does that feed into the portfolio? Does it even affect you?
Raper: To be honest, at the moment, not significantly directly. Indirectly, yes. The trade wars have affected sentiment a lot around the Chinese equity market and particularly, foreign interest in it. But when we come to our portfolio, our portfolio is quite domestically focused and there's two reasons for this. One is that actually historically the exporting companies from China have not been particularly high value-added exporters. That's changing and that's part of the trade war. But historically exporting t-shirts and shoes and simple plastic products has not been an area where we found a lot of opportunities.
On the other side of the coin, we have found consistent and significant growth opportunities in the domestic consumption environment. So, our portfolio naturally is biased towards the domestic consumption side rather than the export side, which is more heavily impacted by trade war conversations. So, to-date, we've been relatively lightly affected by the direct impacts of the trade war. But indirectly, through sentiment, we have seen some impact there.
Black: And you mentioned domestic consumption there. One of the big stories out of China for recent years has been the consumer and the growing middle class. Is that still the strong theme?
Raper: Absolutely is. When we talk about Chinese consumption though, you have to be careful. If it's just about volume of consumption, actually, the Chinese consumer is maturing. They are not mature, but they are maturing. Now, that means volume growth doesn't necessarily sustain at the same rate it did when they were a younger consumer. But the quality of that consumption, the quality of the products that they are consuming from dairy products to insurance products, areas like this are very exciting still to us.
But if you're solely looking at just more people buying more things, that's not enough today. You need to be doing more than that to attract the Chinese consumers' attention and for them to be able to upgrade their consumption towards your products, and that's really where we spend a lot of time looking for companies that have strong brands, strong opportunities to tap into that consumer environment or very strong product pipelines and product portfolios to offer those Chinese consumers.
Black: And I think the other thing we hear a lot is about this slowdown in China, which doesn't seem to have materialized yet, but are things slowing?
Raper: It's a tricky question. Absolutely yes. How far are they slowing I think is the tricky part. So, when we look at headline GDP data, the GDP data is very strong. Now, we know that GDP data has some flaws in it, particularly in China. But even if we look at the alternative datasets, they are still predicting growth, underlying trend growth rate of 4% to 5%. So, a slowdown, yes, but actually, still a respectable real growth rate in the underlying economy.
So, that's important, but structurally, remember, we are looking for companies who have their own internal drivers. So, it's not simply about GDP growth but it's about a change in consumption habits or production habits as the case maybe. So, they are not solely reliant on GDP growth as their one key driver for everything else. Of course, if the economy goes negative, that would be tough. But in an environment where things are at least sticking along, are companies with these structural stories can continue to tap into the structural growth opportunities and expand their market opportunity.
Black: Well, thank you so much for your time.
Raper: Thank you very much.
Black: And thanks for joining us.
