NCEAX: Robust 4Q15 but Dismal YTD Performance

The Neuberger Berman Greater China Equity Fund – Class A (NCEAX) adopts the value-bias strategy, and its objective is to seek long-term capital return in up and down markets. As of January 2016, the net assets of the NCEAX stood at $72.3 million. The fund has a net expense ratio of 1.87%. The fund was launched in July 2013.

The fund has combined exposure of 85.9% to Hong Kong and China, and the balance 14.1% of the portfolio assets are invested in US securities.

The NCEAX generated a positive return of 10.7% for 4Q15 and outperformed its benchmark, the MSCI China Total Return Index, even though the Chinese markets experienced significant volatility in the fourth quarter. In 2015, the NCEAX was up by 0.6% and again outperformed its benchmark.

The returns of the MSCI China Total Return Index for the 4Q15 and 2015 came in at 4.0% and -7.6% respectively.

For the month ended December 31, 2015, the fund’s return was up by 0.8% while year-to-date (from December end to February 26), the fund was down by 16.4%.

It is important to note that the NCEAX holds 18.1%—the highest among all other sectors—of its portfolio assets in cash as of December 31, 2015, which is the latest available data for the fund. It is followed by the information technology and financial sectors with 16.6% and 16.5% weights, respectively. Consumer discretionary and industrials command 12.1% and 11.8%, respectively, of portfolio assets.

The fund continues to focus on companies that have sustainable top- and bottom-line growth by looking at their operating cash flows from their recurring core businesses. As of December 31, 2015, the fund’s largest sector overweight relative to the benchmark was consumer discretionary, followed by healthcare and utilities. The fund’s largest sector underweight relative to the benchmark was financials, followed by energy and telecommunication services.

The fund’s top ten positions comprised 52.9% of the total portfolio assets at the end of December 2015. They include Tencent Holdings (TCEHY), NetEase (NTES), JD.com (JD), and Alibaba Group Holdings (BABA). The fund holds 35 positions in all as of December 2015.

It is widely expected that the Chinese equity markets could continue to experience volatility going into 2016. As the People’s Bank of China seeks for the yuan to have more flexibility and market determination in its exchange rate, this may result in volatility being reflected in both foreign exchange and equity markets.

Moreover, it is expected that the Chinese government may accelerate supply-side reforms to help address issues surrounding excess inventories on state-owned enterprise (or SOE) corporate balance sheets. This may cause short-term pain in certain overcapacity industries such as materials, basic metals, and real estate. However, these reforms could yield long-term economic benefits as well-positioned companies with more robust business models could emerge.