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What areas of the Chinese economy are particularly appealing at present?
Our strategy is bottom-up led. But that said, we're finding huge opportunities in the industrial sector. It’s very innovative and is driven by research and development. There are a lot of new business coming into that sector with new ideas, processes and approaches, which means it is constantly changing and we're constantly finding new ideas.
Looking at China from a more thematic point of view, we are excited about the prospects for consolidation. China is home to some incredibly nascent industries which are fragmented – the largest players only tend to have a market share of three, four or five percent within their particular industries. This means that a leading player that is well run can take market share and also grow via consolidation. This is an area where we are seeing huge opportunity.
How is your strategy able to delve deeper into Chinese markets than others?
The team behind this strategy is large, experienced and local. The manager, Wenli Zheng, has been investing in Chinese equities since 2014, so he has a proven track record, philosophy and process. But it isn't just about the fund manager – it’s about the analyst team providing ideas and insights and uncovering new opportunities.
T. Rowe Price has got a very large analytical footprint in the region. This has been in place for a number of decades now. We have analysts based in Shanghai, Hong Kong and Singapore. To us it’s all about going out, meeting companies, meeting management teams and meeting wider stakeholders around companies in order to generate some really differentiated insights.
We're finding huge opportunities in the industrial sector
The Chinese universe is incredibly deep and diverse
What is it about China that makes for an appealing investment landscape?
China is attractive because it brings scale and dynamism.
On the scale side, we all know that China is the world's most populous country; it's the world's second-largest economy. That provides huge opportunity for Chinese corporates within their domestic market.
But the really exciting feature lies in the dynamic nature of the economy. Over the past 30 years, China has gone through an economic transformation that hasn't been witnessed in any other market in such a short space of time. That has resulted in a population which is naturally adaptive, flexible and innovative. People are willing to try new things, and new companies are coming to the market all the time, which is fantastic for active stock pickers.
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Changes in the economic landscape in China are creating great investment opportunities. But most overseas investors are only accessing the Chinese market through the same established mega caps.
Rob Secker, Portfolio Specialist at T. Rowe Price, explains how the China Evolution Equity Strategy is allowing investors to delve deeper into Chinese markets and uncover hidden opportunities.
INTRODUCTION | Investment landscape | Equity strategy | Asset research | Opportunities
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T. Rowe Price’s Rob Secker on the China Evolution Equity Strategy
Columbia Threadneedle Investments' Sonal Sagar & Michael Hamblett
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THE FUND
ASSET CLASS
INTRODUCTION
What is special about the way the China Evolution Equity Strategy invests?
We believe the strategy provides a unique exposure and access to the Chinese equity market.
The Chinese universe is incredibly deep and diverse. Over 5,000 companies are listed in our universe. Yet the 100 largest companies – the mega caps, as we call them – absolutely dominate the Chinese indices and therefore dominate investors' portfolios.
Our strategy deliberately excludes those mega caps to target a part of the market that we think is under-analysed and under-represented in investors’ portfolios. We feel that makes the strategy unique, differentiated and complementary in nature.
Coats Group makes thread, which is an energy and water intensive process, but essential for clothing, footwear and other industrial applications. Coats is attempting to make the process greener and more sustainable by targeting reductions in water consumption and carbon emissions. The company has also pioneered a fully recycled thread, using no virgin plastic.
This is an example of the type of company we look for in the Threadneedle UK Sustainable Equity fund: a company that is perhaps under the radar, but a leading player in a fragmented market, standing to benefit from consumer trends towards sustainability.
We met the company’s head of sustainability to understand how its non-financial risks and sustainable opportunities are managed, and our opportunity to ask questions and bring the investment case to life, far more than reading the annual report.
Threadneedle UK Sustainable Equity Fund: Portfolio snapshot
Coats Group
Johnson Matthey
Reckitt
Johnson Matthey is a chemicals company that makes solutions for cleaner energy and cleaner air. It has an experienced board and is investing in new and future technologies such as fuel cells and hydrogen. To continue driving its sustainability agenda, this year, it is incorporating ESG and sustainability criteria in executive pay.
Improvements are expected in its top line, margin and cash flow. We believe it is undervalued and, when you combine that with the fact that well over 80% of its revenues contribute to the UN SDGs, it is one of the leading companies within the fund.
To have confidence in our investment, engagement is key. We have met management, board members and collectively engaged with the UN Principles for Responsible Investment on its supply chain. This gives us a better understanding of the risk/return characteristics.
Reckitt is a health, hygiene, and nutrition company. It has had big changes in management and strategy over the last few years and now it is embracing its size and scope, driving more from the group level. As a result, it is well-positioned to effect change.
There is a big focus on how its products are made, with reductions in energy and water usage and more recycling. Reckitt works alongside governments and public health bodies to educate people on issues including cleanliness, infant nutrition, sexual health – this is on top of the positive impact of its products within its hygiene, health and nutrition divisions.
Again, engagement is key: we have met the CEO, CFO, chair, directors in charge of executive pay, heads of sustainability to enable us to get a holistic picture of how the company is improving its management of ESG and sustainability.
Risks - The following risks are materially relevant to the portfolio:
Country risk (China) – all investments in China are subject to risks similar to those for other emerging markets investments. In addition, investments that are purchased or held in connection with a QFII licence or the Stock Connect program may be subject to additional risks.
Currency risk – changes in currency exchange rates could reduce investment gains or increase investment losses.
Emerging markets risk – emerging markets are less established than developed markets and therefore involve higher risks. Small and mid-cap risk - stocks of small and mid-size companies can be more volatile than stocks of larger companies.
Small and mid-cap risk – stocks of small and mid-size companies can be more volatile than stocks of larger companies.
Stock connect risk – the portfolio may invest in certain Shanghai-listed and Shenzhen-listed securities(“Stock Connect Securities”) through the Shanghai-Hong Kong Stock Connect or the Shenzhen-Hong Kong Stock Connect respectively (“Stock Connect”). This mechanism carries higher risk.
Important Information
For professional clients only. Not for retail distribution.
Past performance is not a reliable indicator of future performance. The views and information contained herein are of the author’s and are subject to change. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
UK - This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
© 2021 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/ or apart, trademarks of T. Rowe Price Group, Inc.
202111-1916284
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Source: Morningstar as at 31 July 2021, net of fees, based on Z Acc share class (ISIN: GB00BZ21SS97). Net performance using 12pm prices, unadjusted income reinvested. Peer group is IA UK All Companies. The index is a Composite benchmark. The fund launched 30 October 2015. Past performance is not a guide to future performance.
Threadneedle UK Sustainable Equity Fund: Performance (%)
Fund (net)
FTSE All-Share
IA UK All Cos
3yr
5yr
2020
2019
2018
2017
2016
Since Launch
Year to Date
18.6
44.5
-0.5
21.6
-7.0
14.0
6.7
53.4
9.5
6.6
27.0
-9.8
20.5
-9.2
12.4
12.3
38.8
11.7
12.7
44.0
-7.7
21.9
-10.3
13.0
11.7
49.5
12.3
General Portfolio Risks
Capital risk – The value of your investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the portfolio and the currency in which you subscribed, if different.
Equity risk – In general, equities involve higher risks than bonds or money market instruments.
Geographic concentration risk – To the extent that a portfolio invests a large portion of its assets in a particular geographic area, its performance will be more strongly affected by events within that area.
Hedging risk – A portfolio's attempts to reduce or eliminate certain risks through hedging work as intended.
Investment portfolio risk – Investing in portfolios involves certain risks an investor would not face if investing in markets directly.
Management risk – The investment manager or its designees may at times find their obligations to a portfolio to be in conflict with their obligations to other investment portfolios they manage (although in such cases, all portfolios will be dealt with equitably).
Operational risk – Operational failures could lead to disruptions of portfolio operations or financial losses.
ESG and Sustainability risk – May result in a material negative impact on the value of an investment and performance of the Portfolio.
Opportunities
INTRODUCTION | Investment landscape | Equity strategy | Asset research | Opportunities
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