AIC consults on creating China and India sectors

David Brenchley
AIC consults on creating China and India sectors

The Association of Investment Companies (AIC) is asking for feedback on whether it should create China and India sectors, Investment Week has learned.

The trade body said it was currently consulting with the relevant members and their managers on whether China and India-focused investment trusts should leave the Country Specialist: Asia Pacific ex Japan sector to form their own peer groups.

Feedback from the consultation will determine whether the AIC proceeds with the proposed changes and a decision is likely to be made in Q1 2021, the AIC told Investment Week.

China and India are among the world's largest economies, so it makes sense for each to have their own sector."

The AIC said where possible it looked to use the same sector names and definitions as the Investment Association (IA), so consumers can easily compare funds, both open and closed-ended, with similar objectives.

It noted its statistics committee would take into consideration the recent sector review initiated by the IA, among other factors.

Reaction was broadly positive, with head of PR at interactive investor Jemma Jackson noting "China and India are among the world's largest economies, so it makes sense for each to have their own sector."

Jackson said anything that helps investors navigate the investment company universe was to be welcomed, though countered the platform had "seen a step increase in the number of customers turning to China-focused trusts over the last two months, so they are clearly not struggling to find these trusts that still only account for less than a handful of companies".

The China sector would comprise three companies, with the India sector at four. It would leave three Vietnam offerings and Aberdeen New Thai in the Country Specialist: Asia Pacific ex Japan sector.

Communications director at the AIC Annabel Brodie-Smith said: "As China's share of the world economy increases, it is good to see that investors now have a choice of three investment companies that focus on the Chinese stock market. All have performed well this year as China has recovered swiftly from covid-19."

The move for a China sector comes hot on the heels of Witan Pacific's move to appoint Baillie Gifford as investment manager and switch to a China-only mandate. The sector will house a trio of trusts with a combined market capitalisation of £2.7bn.

Fidelity, which runs the £2bn sector behemoth Fidelity China Special Situations, said it had been in touch with the AIC to initiate a discussion on whether there should be a China sector. The firm's head of investment trusts Alex Denny told Investment Week there were other sectors that housed just three trusts including Asia Pacific Smaller Companies, which houses Fidelity Asian Values.

"There is obviously so much focus on China as an investment class; the IA has got a China peer group - it just makes comparisons much easier," Denny said. "We are quite welcoming of the competition, and it has generated a lot of noise at a helpful time as well."

Denny said it was inevitable that asset allocators would move their China exposure out of the emerging market bucket and towards a standalone part of portfolios.

"I am one of those people who wants to turn around and say ‘China is not a developing market, it is developed'," he added. "There clearly are elements that are, but it is in this rapidly transitional phase. But it should be such an enormous part of equally weighted global indices.

"As we go forward, the really big macro call on a perpetual basis will be US versus China. The fundamental drivers [of asset allocation] will be how the US is competing with China and vice versa. We are not there yet, but I think you will end up at the stage where people should be turning around saying, ‘I have got 25% of my portfolio in China'."

Director of marketing and distribution at Baillie Gifford James Budden said the firm would be in favour of a China sector, "given we believe that investors will inevitably allocate more and more to China on a stand-alone basis in the future".

J.P. Morgan Asset Management (JPMAM) in 2019 changed its China trust's dividend policy to enable it to distribute income to shareholders out of capital profits in a bid to challenge the dominance of Fidelity.

JPMAM's head of investment trusts Simon Crinage said the change had been well received by investors, with JPMorgan China Growth and Income now trading at a near-3% premium compared to its 12-month average discount of 7.3%.

"Overall, China is gaining more traction amongst investors as an attractive investment opportunity," Crinage said.

"We have seen a significant uptick in demand and interest in our trust, especially from a retail perspective, and believe that China will become an increasingly larger part of clients' portfolios going forward."

Matthew Read, senior analyst at QuotedData, said the introduction of a China sector "would be a welcome development and has an air of inevitability about it".

"China is rising as an economic power and, reflecting this, and the long-term structural growth opportunities that it offers, MSCI are increasing its weight within its emerging markets index," Read reasoned.

"Investors will want greater exposure to China over time and, reflecting the fact that, at last for the foreseeable future, a good chunk of these will be generally less liquid and more volatile, a closed-end vehicle such as an investment trust is the optimal structure to use to gain this sort of exposure."

Unicorn Mastertrust portfolio manager Peter Walls said "the sheer size of the Chinese market and economy justifies [a stand-alone sector]", suggesting more China-focused mandates are likely to come to market should current ratings in the peer group remain at elevated levels.

Alongside the JPMorgan trust, FCSS trades at par while BGCG had surged to a 34% premium by last week. "The great thing about the investment trust sector is if you are trading at a premium you can be pretty sure there will be new [entrants] coming along, as we are seeing in the alternative space," Walls said.

Read agreed, noting China was "clearly under-represented in the UK investment trust space at present and I would expect that this will correct over time."

India, too, remains under-represented given its economic clout, Read added, with the country, like China, "continuing to grow in economic might and offering incredible growth prospects for investors."

The four India-focused trusts have a combined market capitalisation of £944m, "sufficient critical mass to justify creating a separate sector", said Read. "This would make it easier for investors to make comparisons and hopefully stimulate demand for the existing strategies," he continued.

"However, with a natural home, a new sector could actually encourage the creation of new funds focused on the space. The prospect of more choice and better liquidity should be positive for investors, so we would welcome such a move."

David Cornell, fund manager of the £87m India Capital Growth fund, said he was "very supportive of this initiative", noting it was "a more granular approach and will enable potential investors to compare and contrast investment trusts which directly compete in the same space".

"The AIC clearly shares Ocean Dial's long-held view that India should now be viewed by investors as a standalone investment and not as part of a catch all product, such as an emerging market fund or an Asia ex Japan fund," Cornell said.

"India is under-represented in all indices given the size of the market and the increasing contribution it makes to economic growth globally, and this move will support greater recognition of that weakness.

"China's dominant weighting in EM funds is an ever growing problem. Not only is it crowding out all other perfectly investible emerging markets where healthy returns can be made, it is also sucking capital away from emerging economies that are already capital scarce."

Read suggested there could be another new sector somewhere down the line, with three trusts currently investing in Vietnam at a combined market capitalisation of £1.9bn.

"Vietnam is another country with a young population and excellent growth prospects that already has three funds dedicated to it," Read reasoned. "If not now, perhaps it will not be so long before we are discussing whether it should also have a sector specifically dedicated to it."

The AIC said a Vietnam sector was not currently under consideration.

This article was first published by our sister title Investment Week