By Philip van Doorn, MarketWatch
What’s going on in China — the MSCI China Index has returned 43% this year? That’s almost four times the gain of the U.S. benchmark index.
And it’s been a smooth upward ride:
If you hold shares of the iShares MSCI China ETF /zigman2/quotes/206267952/composite MCHI +0.46% , which tracks the index, it’s been a wonderful 2017. The S&P 500 Index /zigman2/quotes/210599714/realtime SPX +1.95% of the U.S. has returned 12.2% this year.
But what some investors don’t realize is that the MSCI China index is heavily weighted toward the country’s hottest internet and computer stocks. With a fast-rising middle class in the world’s most populous nation, China’s other industries — banking and insurance, among others — also will benefit.
That’s why investors might consider owning an actively managed mutual fund.
A review of the top 10 holdings of the iShares MSCI China ETF shows how it skews toward tech:
|Company||Ticker||Share of portfolio||Total return - 2017 through Aug. 31|
|Tencent Holdings Ltd.||/zigman2/quotes/204605823/delayed HK:700||16.1%||74%|
|Alibaba Group Holding Ltd.||/zigman2/quotes/201948298/composite BABA||13.1%||96%|
|China Construction Bank Corp.||/zigman2/quotes/208974133/delayed HK:939||5.2%||21%|
|China Mobile Ltd.||/zigman2/quotes/200868736/delayed HK:941||4.8%||8%|
|Baidu Inc. ADR||/zigman2/quotes/209050136/composite BIDU||4.2%||39%|
|Industrial and Commercial Bank of China Ltd.||/zigman2/quotes/201401473/delayed HK:1398||3.9%||33%|
|Ping An Insurance (Group) Co. of China Ltd.||/zigman2/quotes/210315058/delayed HK:2318||2.9%||62%|
|Bank of China Ltd.||/zigman2/quotes/204682472/delayed HK:3988||2.9%||26%|
|JD.com Inc. ADR||/zigman2/quotes/205122565/composite JD||1.9%||65%|
|China Life Insurance Co. Ltd.||/zigman2/quotes/202359856/delayed HK:2628||1.6%||26%|
|Source: Morningstar Direct|
Tencent Holdings Ltd. /zigman2/quotes/204605823/delayed HK:700 -1.59% and Alibaba Group Holding Ltd. /zigman2/quotes/201948298/composite BABA +1.47% made up a combined 29.2% of the MSCI China ETF (and a similar share of the index) on Aug. 31. So with Tencent up 74% this year and Alibaba nearly doubling, it’s no wonder the index has rocketed 43%.
According to Andrew Mattock, the lead manager of the Matthews China Fund /zigman2/quotes/201270776/realtime MCHFX +0.42% , the median year-to-date performance for the roughly 2,000 stocks included in Hong Kong’s Hang Seng Index /zigman2/quotes/210598030/delayed HK:HSI -0.47% , is “closer to zero.”
In an interview on Aug. 31, Mattock said “it’s very easy to generalize” when talking about China’s economy and its industries, so he and his team focus on selecting companies based on assessments of the quality of management.
Matthews Asia is headquartered in San Francisco, and has $31 billion in assets under management. Mattock became the lead manager for the Matthews China Fund in June 2015 after working at Henderson Global Investors for 15 years.
It has been “very hard to keep up” with the MSCI China Index because of the tech weighting in the two aforementioned internet giants, Mattock said. But such popular stocks “tend to tend to get bid up eventually,” to unsustainable levels, he added.
“Such a large concentration in those two stocks gives us an opportunity to outperform the passive alternative. This is the opportunity for us, because this internet space is such a large part of that index and ETF,” he said.
U.S. investors are constantly told to choose passively managed funds because active managers tend to lag the performance of stock indices. That makes sense in a bull market, but the heavy weighting of the largest stocks in an index could lead to additional volatility and greater risk in the long run.
The three-year chart for the ETF and the Matthews China Fund show that investors have been faced with plenty of volatility, with the active strategy coming out slightly ahead: /zigman2/quotes/201270776/realtime MCHFX +0.42%
The Matthews China Fund has $760 million in total assets. Mattock aims to hold about 35 stocks, and the fund is rather heavily concentrated, with its top 10 holdings making up half of the assets as of July 31:
|Company||Ticker||Share of portfolio||Total return - 2017, through Aug. 31||Total return - 3 years||Total return - 5 years|
|Tencent Holdings Ltd.||/zigman2/quotes/204605823/delayed HK:700||11.0%||74%||162%||603%|
|Alibaba Group Holding Ltd.||/zigman2/quotes/201948298/composite BABA||6.7%||96%||N/A||N/A|
|China Life Insurance Co.||/zigman2/quotes/202359856/delayed HK:2628||6.2%||26%||19%||31%|
|Ping An Insurance (Group) Co. of China Ltd.||/zigman2/quotes/210315058/delayed HK:2318||5.1%||62%||106%||138%|
|Industrial & Commercial Bank of China Ltd.||/zigman2/quotes/201401473/delayed HK:1398||4.5%||33%||35%||87%|
|China Construction Bank Corp.||/zigman2/quotes/208974133/delayed HK:939||4.5%||21%||40%||80%|
|Bank of China Ltd.||/zigman2/quotes/209359942/delayed CN:601988||3.9%||29%||81%||100%|
|China Merchants Bank||/zigman2/quotes/209899244/delayed HK:3968||3.5%||68%||124%||182%|
|Ctrip.com International Ltd. ADR||2.6%||29%||60%||538%|
|Sina Corp.||/zigman2/quotes/206755492/composite SINA||2.4%||82%||154%||109%|
|Source: Morningstar Direct|