China has repeatedly disappointed investors. After a strong 2020, the country's post-pandemic economic recovery failed to materialize. Regulatory clampdowns, a property crash, and equity market drama then further dampened hopes of a longer-term success story.
Little wonder, then, that the Morningstar China index has notched up three consecutive years of losses, with a fourth on the way despite a strong showing in April and May this year.
China equity funds have struggled in these conditions. But Morningstar analysts maintain a positive view of certain strategies, rating seven with the highest Medalist Rating of Gold.
In September 2024, the T.Rowe Price China Evolution Equity Fund and the FSSA All China Fund led the pack of the best performing China Equity funds year-to-date.
The Best-Performing and Best-Rated China Funds
Data in this article is sourced from Morningstar Direct. To find the best-performing funds, we screened Morningstar Medalist Rated UK-domiciled funds with their base currency in pound sterling that invest in China.
This chart shows the volatile performance of China-focused funds since the start of 2024.
Here is what Morningstar fund analysts think of the funds.
FSSA All China Fund
• Year-to-date performance: -10.03%
• Morningstar medalist rating: Gold
• Equity Style Box: Large Blend
• Fund Size: £57 million
• Morningstar Rating: 4 stars
• Morningstar Category: China Equity
Over the last three years to September 2024, the FSSA All China Fund lost -37.33%, just underperforming the Morningstar China index, which returned -36.25%. Year to date, the fund is also down -10.03%.
The fund's top 10 holdings range from Tencent (TCEHY) to JD.com (JD), yet the strategy prefers smaller companies compared with the average fund in the China Equity Morningstar category. The portfolio has also steered away from stocks that pay dividends or offer buybacks.
The portfolio is overweight industrials and consumer defensive stocks while it has a low exposure to technology and the consumer cyclical sector. The fund was also given a High Process Pillar rating by Morningstar due to its long-term risk adjusted performance.
FSSA Greater China Growth Fund
• Year-to-date performance: -7.02%
• Morningstar medallist rating: Gold
• Equity Style Box: Large Blend
• Fund Size: £395.8 million
• Morningstar Rating: 4 stars
• Morningstar Category: Greater China Equity
Morningstar analysts back the FSSA Greater China Growth Fund despite its underperformance. Morningstar points to the 28-year-experience of lead manager Martin Lau, who is described as an expert investor with a "stellar" long-term track record of investing in Chinese equities.
However, this strategy has suffered because of its investments in consumer names hit hard by weaker consumer confidence in the country. Tencent Holdings (TCEHY) and Anta Sports Products (02020) are two of the names in its top 10 holdings.
Over the three years to September 2024, the fund returned -27.39% versus the Morningstar China TME Index, which lost -32.74. However, over the past 15 years the fund returned 9.29% per year, outpacing the MSCI Golden Dragon Index's 7.24% gain and beating out 90% of its peers.
FSSA China Growth VI Fund
• Year-to-date performance: -13.24%
• Morningstar medallist rating: Gold
• Equity Style Box: Large Blend
• Fund Size: £1.6 billion
• Morningstar Rating: 4 stars
• Morningstar Category: China Equity
Despite its recent underperformance, Morningstar analysts say lead manager Martin Lau is a China equity veteran with a good approach. Boasting 28 years of experience, Lau applies a bottom-up investment approach that looks to identify quality growth companies at reasonable valuations.
Avoiding energy stocks and cheaply-valued but lower-quality state-owned enterprises, Lau has stuck with consumer names, but they themselves have plummeted on concerns over China's weak consumer spending.
However, Lau has remained constructive on the longer-term consumer upgrade trend in China, adding companies such as China Mengniu Dairy (02319) and Anta Sports (02020) whose share prices look attractive.
Year to date, the fund lost -13.24% versus the Morningstar China TME Index.
Man Numeric China A Equity Fund
• Year-to-date performance: -5.8%
• Morningstar medallist rating: Gold
• Equity Style Box: Large Blend
• Fund Size: £10.1 million
• Morningstar Rating: 5 stars
• Morningstar Category: China Equity — A Shares
This portfolio is overweight stocks in basic materials, although its allocation to energy is like other funds in Morningstar's China Equity Category.
However, the fund has low exposure to consumer defensive and the industrials sectors. For Morningstar analysts, the management team's industry experience has driven its High People People Pillar Rating, while its investment philosophy for the portfolio is considered sensible enough to warrant an Above Average Process Pillar rating.
Over three years to September 2024, the portfolio saw losses of -31.17%, just beating the Morningstar China TME Index, which lost -32.74%. YTD the fund also lost -5.80%.
Schroder ISF Greater China
• Year-to-date performance: -5.88%
• Morningstar medallist rating: Gold
• Equity Style Box: Large Blend
• Fund Size: £1.6 billion
• Morningstar Rating: 4 stars
• Morningstar Category: Greater China Equity
Morningstar has given the Schroder ISF Greater China Fund a Gold Medalist Rating because it continues to benefit from veteran portfolio manager Louisa Lo's approach.
Morningstar analysts believe Lo's 30 years of experience make her one of the top fund managers in the Greater China Equity space. The fund has a growth tilt, with a preference for consumer and electric vehicle-related stocks. Lo has also begun to hold positions in oil companies to better navigate China's macroeconomic headwinds.
Over the last three years the fund returned -33.26% and YTD it is down -5.88%. Morningstar puts this underperformance down to Lo's quality growth style, which has found itself out of favor during a value-oriented rally.
T. Rowe Price Funds OEIC China Evolution Equity Fund
• Year-to-date performance: -3.02%
• Morningstar medallist rating: Gold
• Equity Style Box: Large Blend
• Fund Size: £4.6 million
• Morningstar Rating: N/A
• Morningstar Category: China Equity
Compared to its Morningstar category, this fund is overweight industrials and real estate and underweight financial services and technology. The portfolio tilts towards smaller and more growth-oriented companies. Holdings have been more liquid than other Morningstar category peers, but this has made it easier for the fund to sell them in market downturns.
Unfortunately, since the fund's inception in December 2021, it has not produced a positive return rate, losing -37.70% versus the Morningstar China Index, which lost -29.79. However, year to date, the fund only lost -3.02% versus the index, which returned -2.33% over that same period.
Schroder International Selection China A
• Year-to-date performance: -2.33%
• Morningstar medalist rating: Gold
• Equity Style Box: Large Blend
• Fund Size: £1.5 billion
• Morningstar Rating: None
• Morningstar Category: China Equity - A Shares
Since March 2022 this fund has lost -35.84% versus the Morningstar China TME Index, which only lost -10.35%. Despite the fund's torrid performance, it remains one of Morningstar's top picks for China A-share exposure. Lead portfolio manager Jack Lee has 25 years' experience investing in the space. The portfolio has become more diversified with 60 to 70 holdings since late 2020, up from around 50 names. Lee expanded the holdings so as to weather heightened market volatility.
Morningstar analysts concede that, although this strategy has delivered great results over Lee's tenure, in the short term it has been badly hit by the quality growth style losing favor. Year to date, the fund returned -18.25% versus the Morningstar China TME Index, which only lost -2.33%.
Matthews Asia Funds — China A-Share Fund
• Year-to-date performance: -9.84%
• Morningstar medallist rating: Silver
• Equity Style Box: Large Growth
• Fund Size: n/a
• Morningstar Rating: None
• Morningstar Category: China Equity — A Shares
This fund is overweight in industrials and consumer cyclical stocks, although it has a significantly low exposure to healthcare and financial services. The strategy also skews towards smaller and higher-growth companies in comparison to peers. The Silver Rated fund's top holdings range from BYD to Sungrow Power Supply. Since July 2022 to September 2024, the fund has returned -37% versus the Morningstar China TME, which lost -21.48%.
Abrdn SICAV I — All China Sustainable Equity Fund
• Year-to-date performance: -10.63%
• Morningstar medallist rating: Silver
• Equity Style Box: Large Blend
• Fund Size: £202.8 million
• Morningstar Rating: None
• Morningstar Category: China Equity
The strategy is managed by a four-member team with an average of 14 years of investment experience and 11 years of firm tenure between them. As part of its sustainability considerations, the strategy excludes at least 20% of the investable universe, with weapons and tobacco kept out the portfolio. However, the team looks to invest in quality-growth-focused companies in the China A-shares universe. The team also looks for opportunities in both onshore and offshore China equity markets, and historically the portfolio's onshore/offshore split has been largely on par with the benchmark.
Year-to-date, the fund lost -10.63%, underperforming the Morningstar China TME Index, which saw a -2.33% return rate.
JPMorgan Funds — China A-Share Opportunities Fund
• Year-to-date performance: -11.5%
• Morningstar medalist rating: Silver
• Equity Style Box: Large Blend
• Fund Size: £2.1 billion
• Morningstar Rating: None
• Morningstar Category: China Equity — A Shares
Despite recent underperformance, Morningstar backs this fund because of lead portfolio managers Rebecca Jiang and Howard Wang. Wang is a Greater China Equity veteran with 29 years of experience, and Jiang brings 19 years of experience. According to Morningstar's research analysts, the duo has stayed true to its growth-oriented approach even during adverse times, with the portfolio exhibiting a long-standing bias toward technology, consumption, healthcare, and new energy-related names.
The duo focuses on companies' five-year expected return in considering stocks' relative attractiveness, and they can tolerate rich valuations at times if they believe in a company's ability to deliver earnings growth over time. This has worked well in growth-driven rallies, but it has backfired during the recent selloff of China equities, where some expensive stocks fell short of the team's growth expectations amid weak Chinese consumer spending.
Year to date, the fund lost -11.5%, underperforming the Morningstar China TME Index, which saw a -2.33% return rate.
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