Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
… and China ahead in the cycle
According to Alison Shimada, the lead portfolio manager (PM) for Allspring Global’s Total Equity Emerging Markets team, based in San Francisco, the China region stocks do not have as far to decline in the cycle as the US.
China, for instance, and the rest of North Asia, had already seen re-pricing among its big tech stocks last year and other share prices were also knocked down, she said on a visit to Australia last week (May 23-27).
Shimada, who joined the former Wells Fargo Asset Management in 2003, has been a frequent visitor to Australasia, where the firm, as Allspring Global, retains institutional clients in both Australia and New Zealand. Her co-lead PM and China specialist, Elaine Tse (photo above), is also a veteran of the firm, having joined in 2000.
Tse started as senior analyst for North Asia, after serving her apprenticeship in Hong Kong for Fidelity. They were both promoted to their current positions in 2018 ahead of the retirement that year of Anthony Cragg, who had run the emerging markets business for Wells Fargo Asset Management since 2005. They have seen all the twists and turns in markets and investor behaviour over more than 20 years.
The Total team’s two China strategies – All China, including China ‘H’ shares, and China A for the mainland ‘A’ share market – are based on the Wells Fargo Asset Management China equity strategy established in 2009. The exclusively China A strategy was launched in 2020 to supplement the All China strategy which was launched in 2016.
Andy Sowerby, Melbourne-based managing director and head of APAC (ex-Japan), said the All China strategy had had only one calendar year of underperformance – 2019 – since inception. Unusually for most managers, he said, the strategy had outperformed through both growth and the more recent value cycles. Three of the five winning years showed very strong outperformance.
The since-inception net return for the Total All China Equity fund is 9.13 per cent a year, compared with a benchmark return of 3.43 per cent.
Sowerby, who joined the firm earlier this year after previously running multi-affiliate manager Legg Mason in Australia and New Zealand prior to its takeover by Franklin Templeton, said during Shimada’s visit that institutional investors were looking for a different approach to some of their equity portfolios.
“They are thinking that they may need to diversify their risk more away from growth stocks,” he said. “And also, following the recent re-pricing, they are also looking at China and other emerging markets from a price point of view. With emerging markets already corrected they are wondering whether it’s time to put more of their money to work there.”
Sowerby says that, notwithstanding Australia’s political concerns about China’s expansionism, as expressed through the federal election campaign and subsequently, the conversations with investors and consultants had been “very thoughtful”.
“We don’t think people are making rash decisions or rushing into changes,” he said. “The other question for them is what’s happening in the developed markets. That’s the other side of the equation.”
Allspring’s ‘Total’ teams tend to manage specialist strategies, including emerging markets, with a traditional top-down and bottom-up approach, the ultimate decision to invest being stock specific.
Shimada says: “You can’t invest in 23 or 24 emerging markets countries without having a macro view. You have to for all the countries we invest in. We drill down through the sectors and then the companies… The macro view is a necessary but insufficient condition for investment.”
Of the recent political upheaval and demonstrations in Hong Kong, she says there has not been a major impact on the market nor Allspring’s portfolio of H shares in the All China strategy. H shares are for mainland-based companies listed in Hong Kong and other ‘foreign’ markets. A lot of leading A shares companies also have H shares, which are more readily purchased by non-Chinese investors and often trade a discount to the corresponding A shares.
Shimada says of global investing generally: “I don’t think what’s happening in China is a foreign story. Barriers to trade are going up everywhere. It’s not a world of free trade anymore… China’s GDP is now based on domestic consumption. Industries are geared to the domestic market. To be successful in future, experience is going to be really important as we are entering a new market paradigm.”
