KEY POINTS

• We believe that OSK-UOB Big Cap China Enterprise Fund could be a good pick for investors who wish to invest in China market for its
  • Consistent outperformance
  • Higher level of resilience
  • Better risk returns and Sharpe ratio
  When compare with MSCI China Index (RM) and ING China Access Fund.

The recent market correction has provided investors opportunities to invest in markets with sound economic fundamental at attractive valuation. We believe that China, one of the most undervalued equity markets among the markets that we cover, should not be overlooked by investors. In our previous article, we highlighted several reasons why we favour Chinese equity market.

1. China remains the global growth powerhouse over the next decade while the 12th Five Year Plan stresses a more sustainable and balanced growth model.
2. International investors under-invest in China.
3. Earnings have hit a record high but the equity market still has a long way to reflect the earnings.
4. Solid earnings of large banks bode well for the financials-heavy equity market.
5. Monetary policy shifting from tightening to easing could be the major catalyst for equity market
6. Market valuations are now at an extremely attractive level – at the level not seen since the 2008 global financial crisis

Which China Equity Fund Should You Consider?

What fund should investors consider if they would like to invest in Chinese equity market? In this article, we use the same criteria in selecting our Recommended Fund,

1. Performance
2. Risk/Resiliency
3. Expense Ratio

to explain why we think OSK-UOB Big Cap China Enterprise Fund (the Fund), a fund that invests in equities and equity-linked securities issued by companies whose business are in China, will be a good pick.

Fund Info

Criterion 1: Consistent Outperformance

Compare With Benchmark, MSCI China Index (RM)

As showed in Chart 1, the Fund has significantly outperformed its benchmark, MSCI China Index (denominated in RM) since its inception. Comparing the cumulative period returns of the Fund with its benchmark (refer to Table 2) shows that the Fund outperformed its benchmark over the longer time frame, i.e. 3-year periods. As the Fund declined more than its benchmark after 17 November 2011, this has dragged down its performance in 2011.

CHART 1:

On a calendar year basis, the Fund declined lesser than its benchmark in 2008, reporting a 33.8% loss as compared to the 49.7% plunge of its benchmark. When the economy recovered in 2009, the Fund rebounded significantly by 53.4%, but underperformed its benchmark that returned a 57.9% gain.

Regardless of the underperformance in 2009, the Fund managed to return a 3.8% gain in 2010 despite the Chinese equity market being depressed by the policy risks. These included hike in bank’s required reserve capital, various tightening moves as well as escalating inflation. Moving into the volatile 2011, the Fund underperformed its benchmark again, losing 20.1% as compared to the 17.4% loss of its benchmark.

Overall, due to the much better performance in both 2008 and 2010, the Fund returned -15.9% since its inception on 3 December 2007, significantly outperformed the -45.1% returns of its benchmark.

Compare With Peer

As OSK-UOB Big Cap China Enterprise Fund is the only Chinese equity fund on our platform; hence, we compare it with its peer that are outside of our platform. According to the fund classification of Lipper, ING China Access Fund is the only peer for OSK-UOB Big Cap China Enterprise Fund, launched on 11 January 2008, and mainly invests in companies whose businesses are exposed to the Chinese economy.

Chart 2 shows that the Fund has outperformed ING China Access Fund since November 2008 and the outperformance has widened since the last quarter of 2010 as the Fund declined lesser than ING China Access Fund during the market downturns.

CHART 2:

Further analysis on the cumulative period returns (refer to Table 3) shows that the Fund underperformed ING China Access Fund over the shorter time frame but outperformed in 3-year period.

On a calendar year basis, the Fund performed less resilient than ING China Access Fund when market fell in 2008 and 2011. Having said that, the Fund returned higher in 2009, 53.4% gain as compared with 51.4% gain of ING China Access Fund. In addition, the Fund recorded positive returns of 3.8% in 2010 when ING China Access Fund suffered loss of 3.1%. Overall, the Fund returned -7.4% since 11 January 2008, higher than the -14.3 returns of ING China Access Fund.

Criterion 2: Higher Resiliency

Other than looking at the fund performance, we also compare the resiliency of OSK-UOB Big Cap China Enterprise Fund against its benchmark and ING China Access Fund to examine how well they hold up during market downturns. Based on the MSCI China Index (RM), we identified 7 downturn periods over the past 4 years (shaded in red in Chart 1).

The Fund tends to decline lesser than its benchmark during the market downturns as showed in Chart 3. Out of 7 market downturns over the past 4 years, the Fund beats its benchmark over all the 6 downturn period and was well-cushioned in the 2008 financial crisis. For example, during the period from 11 January 2008 to 18 March 2008 and 24 April 2008 to 27 October 2008, the Fund declined 15.2% and 41.9% respectively, while the benchmark plunged 31.2% and 59.2% for the same period. This suggests that the Fund has higher level of resiliency as compared to its benchmark.

CHART 3:

Out of 7 market downturns over the past 4 years, the Fund beats its peer over 3 downturn periods (refer to Chart 4). Again, the Fund was better sheltered in the 2008 crisis as compared with ING China Access Fund. This is because the Fund declined 41.9% in the period of 24 April 2008 to 27 October 2008 which was much lesser than the 49.0% slump of ING China Access Fund. In addition, the Fund dropped 4.1% during the period of 10 December 2008 to 20 February 2009 while ING China Access Fund declined 14.2% during the same period.

The Fund failed to beat ING China Access Fund during the downturn periods from

• 11 January 2008 to 18 March 2008
• 14 December 2009 to 30 June 2010
• 7 April 2011 to 5 October 2011
• 17 November 2011 to 30 December 2011

Nevertheless, the magnitude of underperformance in the Fund as compared with ING China Access Fund are rather small. Hence, we believe that the Fund still has higher level of resiliency than ING China Access Fund during market slumps.

CHART 4:

Criterion 3: Annual Expense Ratio

Expense ratio is also one of the criterions to consider when we select our Recommended Fund. This is because expense ratio takes into account all the expenses that the fund incurs, including management fee, administration and transaction costs, and marketing on a yearly basis. As these expenses are deducted from the asset value of the fund, the lower the expense ratio, the better it is for investors, because inventors pay less.

Table 4 shows that ING China Access Fund has higher annual expense ratio in Financial Year (FY) 2009. This is due to longer calculation period, which was about 16 months since its inception on 11 January 2008. On an annualised basis, the expense ratio for ING China Access Fund in FY2009 was 1.51%, which is lower than the 1.91% of the Fund.

Annual expense ratio for ING China Access Fund remained lower than the Fund in FY2010 as the average fund size of ING China Access Fund increased significantly by 22.2% to RM58.15 million. This has lowered the annual expense ratio. Nevertheless, ING China Access Fund has similar annual expense ratio with the Fund in FY2011, if we annualise the expense ratio of the Fund to 1.90%.

Conclusion

Table 5 summarises the above mentioned analysis.

While the returns of the Fund are comparable with ING China Access Fund, the higher annual expense ratio could view as investors willing to pay more for the higher resiliency of the Fund. Gauging the returns and volatility together, the Fund shows higher risk returns ratio and Sharpe ratio than its benchmark and ING China Access Fund (refer to Table 6).

To conclude, we believe that OSK-UOB Big Cap China Enterprise Fund could be a good pick for investors who wish to invest in China market for its

• Consistent outperformance
• Higher level of resilience than its benchmark and ING China Access Fund
• Better risk returns and Sharpe ratio