T. Rowe Price, the US$1.67trn global asset manager, has expanded its UK-domiciled OEIC range with the launch of the China Evolution Equity Fund.
The fund is managed by Hong Kong-based portfolio manager Wenli Zheng, who has been responsible for Greater China focused investments since 2014 and is supported by a large local team of China focused analysts. T. Rowe Price, which has in excess of US$32bn under management in Chinese equities, has a long history of investing in Asia, with the unveiling of its first equity mandate in the region more than four decades ago.
The T. Rowe Price China Evolution Equity Fund has been designed to offer a differentiated exposure to the global economic powerhouse. The fund seeks to avoid the largest 100, well known, mega-cap Chinese stocks and instead focuses on opportunities in the remainder of the market – which the team considers to be overlooked and under-explored.
China is a deep market with more than 5,500 public companies. However, investors largely focus on the top 100 mega-cap Chinese stocks, with these dominant names accounting for almost 70% of the MSCI China Index and 59% of the average allocation among the 10 largest Chinese equity funds. As a result, the majority of the Chinese opportunity set is overlooked. The T. Rowe Price China Evolution Equity Fund actively targets the diverse under-owned and under-researched opportunities outside of the mega-caps.
In addition to higher mega cap exposure, the MSCI China Index is also biased towards Hong Kong-listed companies, currently offering only a 13% allocation to onshore A-Shares. In contrast, the China Evolution Equity Fund has three times as much exposure to the underexplored A-Share market than the benchmark, with its weighting towards A-shares and H-shares broadly balanced at launch.
Wenli Zheng explains: “China is a dynamic economy that is constantly changing. We believe focusing on emerging trends and companies rather than on the incumbents will enable us to unearth the winners of tomorrow. Digging deeper into this rich universe also allows us to discover mispriced opportunities and hidden gems.
“We adopt a holistic approach to the Chinese market and seek bottom-up ideas with the best risk/reward profile. We are unconstrained by index or style. We believe that to best capture the opportunities China offers, investors should have the flexibility to build a portfolio that is very different from the benchmark.”
In populating the China Evolution Equity portfolio, Zheng seeks to identify mispriced opportunities within three buckets. Firstly, there are the ‘compounders’, where the market underappreciates the long-term duration of growth. Next, the ‘non-linear growers’, where business fundamentals could have step-function change driven by product or industry cycles. Finally, there are the ‘special situations’, opportunities ripe for a reversal of fortune once transitory and fixable issues are overcome.
John Yule, Head of UK and Ireland, T. Rowe Price, adds: “China is arguably becoming the most dynamic equity market in the world, but it remains meaningfully underrepresented in global indices – with most investor allocations skewed towards a narrow subset of well-known mega cap names. We believe our new strategy can play a key role in complementing investors’ existing China exposure.”
In addition to a UK-domiciled OEIC, the China Evolution Equity Fund is also available for investors on T. Rowe Price’s Luxembourg-domiciled SICAV which launched in August 2020.