Aberdeen Asset Management is to launch a China A share fund on March 16 2015, investing for long-term growth in mainland China.

 

 The new Fund, domiciled in Luxembourg, will make use of Aberdeen’s 600 million renminbi RQFII facility, which was granted to the group’s Asian arm late last year. It will be run by their Asian equities team, based in Hong Kong and Singapore, which has been investing in China since the 1980s.

 

Although the Fund has an investible universe of some 2,000 companies listed in Shanghai and Shenzhen, it will invest in only 25-30 of the most high quality companies with compelling, long term prospects. The investment team will follow the rigorous investment process the company has in place, with careful due diligence its hallmark.

 

 Aberdeen’s move into A shares comes as interest in the market has taken off. Last year A shares rose 46.89%, the bulk of the rise coming in the final quarter. However, the A share market is notoriously speculative, with recent buying led by margin traders betting on interest rate cuts.

 

China’s economy faces a deflationary pull as years of investment drag down growth (now at a 25-year low) and Beijing aims to stimulate more household spending, with the private sector taking a greater lead in growth.

 

For Aberdeen, these trends are positive as they should over time lead to more market-based pricing, competition and investor transparency. From the start the new Fund will have a bias to consumer, healthcare and travel companies – all areas where state-owned enterprises are less dominant.

 

Lack of transparency is a widespread problem in China. For example, in its existing China portfolios, which comprise mainly H shares and Hong Kong-listed companies, the company has long shunned mainland internet companies that list overseas because of the lack of legal protection for shareholders via so-called VIE structures.

 

The ability to draw on in-house governance experts is one differentiator for Aberdeen. In the new fund their forensic skills will be all the more vital given mainland domestic listed companies’ weaker reputation.

 

For that reason Aberdeen’s China strategy is still to prefer companies listed offshore; the new fund is a complement in that it permits investment in companies that, were it not for RQFII, would remain largely off-limits to foreigners.

 

 

 

The Luxembourg-domiciled Fund will be marketed to investors in Singapore and Hong Kong, with a minimum investment of US$200,000. Other share classes will be on offer for European-based investors with a higher minimum US$1 million initial investment.

 

Nicholas Yeo, head of Chinese equities at Aberdeen Asset Management, comments: “While we are excited about its potential, China is going through a complex adjustment. A strategy of focusing on quality of growth is right but there will be legacy issues for years to come in the shape of bad debt, corporate malfeasance and even outright fraud. So with this fund we are not saying now is the right time to buy the market, but asking investors to consider China as a long-term proposition – one, furthermore, we have been working on indirectly for many years through the build-up of our team and mainland research. China may be a massive country but it is very much an emerging market that demands discipline and patience.”