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Going Passive: Considering Chinese Stocks in 2016

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Performance of passive funds

The iShares China Large-Cap ETF (FXI) is the most heavily traded ETF that invests in Chinese equities. It manages $4.7 billion in assets and is invested in 51 holdings. Its total returns for 1Q16 stood at -4.6% while the returns for March were 12.7%.

Financials, telecom services, and energy are the top three invested sectors, in that order. Financials command over half of the fund’s portfolio, which tracks the FTSE China 50 Index.

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Sectors

Among the various sectors, energy posted the highest total return in 1Q16, and the biggest individual gainers were China Coal Energy and CNOOC Ltd. (CEO). Tencent Holdings (TCEHY) was the sole holding from the information technology sector and posted gains in the period.

The telecom services sector also posted small gains with China Telecom Corp. (CHA) posting the highest total returns. However, its biggest component, China Mobile Limited (CHL), fell in 1Q16. Financials were the biggest sectoral decliners in 1Q16, with China Life Insurance (LFC) and China Vanke declining the most in the period.

ETFs

The Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (ASHR), which tracks the CSI 300 Index, is invested in 313 holdings, and it manages assets worth $422 million. Financials form 41% of the portfolio, with the industrials and consumer discretionary sectors making up a little over a quarter of the assets combined. It posted -13.2% total returns in 1Q16 and 13.6% in March.

The iShares MSCI China ETF (MCHI) tracks the MSCI China Index, is invested in 158 holdings, and manages assets worth $2 billion. The fund’s total returns for 1Q16 stood at -4.8%.

The SPDR S&P China ETF (GXC) tracks the S&P China BMI Index, is invested in 361 holdings, and manages assets worth $735 million. The fund’s total returns for 1Q16 stood at -4.8%.

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Performance of active funds

The Templeton China World Fund – Class A (TCWAX) is one of the largest actively managed funds investing in Chinese stocks. The fund was managing assets worth $291 million at the end of February 2016, spread across 53 stock holdings. The total returns of TCWAX stood at -0.2% for 1Q16.

The Matthews China Dividend Fund – Investor Class (MCDFX), which was managing $144 million in assets and was invested in 45 holdings, was down by 2.7% in 1Q16. Meanwhile, the Columbia Greater China Fund – Class A (NGCAX) declined by 6.5% in the period.

Observation

TCWAX has been the clear winner among the actively and passively managed funds. The funds, which have closely tracked China’s benchmark stock indexes, have declined in double digits. Given their respective asset sizes, investors seem to prefer passive over active funds for investing in Chinese stocks.

As of this time, using a passive fund as an anchor seems to be a sound strategy. Once the effects of China’s restructuring are visible, then a suitable active fund can be considered as well.

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