Ignore volatility, invest spare cash in China fund: Edelweiss MF

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Edelweiss Asset Management Company, which has a Fund of Funds (FoF) feeding into the JP Morgan Greater China Fund, has asked its investors with spare cash to invest further in the fund. 

Recent regulatory clampdowns on industries like private tuitions and online gaming, and financial troubles with Evergrande, a real estate developer, have caused a sharp fall in Chinese markets as well as global markets. However, the Edelweiss note has dismissed these concerns with respect to the prospects for its FoF.

“Edelweiss Greater China Equity Offshore Fund is an open-ended fund of fund scheme investing in JPMorgan Funds – Greater China Fund which invests in companies from the People’s Republic of China, Hong Kong and Taiwan. The recent episode of Bond rating downgrade of Evergrande group and rebuke of China’s Gaming sector has induced short term volatility in the Chinese markets. Evergrande is neither held by JPMorgan Greater China Fund nor in any of the JPMorgan Emerging Markets or Asia funds. In fact, the fund managers do not formally cover Evergrande as a company due to quality issues and its inability to generate free cash flow,” a note issued by Edelweiss Asset Management said. It further opined that the Chinese government may allow defaults but they would be ‘orderly’ in nature.

The JP Morgan Greater China Fund counts Taiwan Semiconductor, Tencent and Alibaba Group Holding Ltd as its top three holdings with weights of 10.01%, 8.98% and 6.32% respectively. 

According to the note, internet companies like Tencent have been enjoying a preferable tax rate which is subject to review every 3 years. The preferential rate may not continue forever but will see gradual increases, it added. 

“Investors with long term horizon are advised to stay patient as the fund managers see this volatility as transitory. In fact, investors who have spare cash should invest more and build their positions further in the fund,” the note said. 

The Edelweiss Fund has assets under management of 1,838 crore. Launched in 2009, it was previously a JP Morgan fund. However, Edelweiss AMC acquired JP Morgan Asset Management in India in 2016. The fund has delivered returns of 16.15%, 18.96% and 23.51% over the past 10, 5 and 3 years outperforming the S&P BSE 500 over all those time periods. In the last year however, Chinese stocks have slid while Indian stocks showed a strong rebound. As a result the S&P BSE 500 has a return of 56.57% compared to 12.38% for the Edelweiss Greater China Equity Offshore Fund.

Apart from Edelweiss Greater China Equity Offshore Fund, there are a few other Indian mutual funds that have exposure to Chinese stocks. Axis Greater China Equity Fund of Funds was launched on 11th February 2021 and currently has assets of 121 crore. It is down 15.80% since launch. It feeds into Schroder International Selection Greater China Fund. The latter also counts tech companies amongst its top holdings such as Taiwan Semiconductor, Alibaba and Tencent. 

Nippon India Hangseng BeES is another scheme with China exposure, It is a passive fund tracking the Hong Kong based Hang Seng Index and is down 14.16% over the past 6 months. However it does not count Evergrande among its top holdings. Navi Mutual Fund which is part of the Sachin Bansal owned Navi Group has filed for a feeder fund to track the MSCI China Index with Sebi.

However, the fund has not yet been launched. “One event should not alter your asset allocation to China or elsewhere. If China is part of your global asset allocation, stay put. The same goes if you have US or Europe funds,” said Amol Joshi, founder, Plan Rupee Investment Services. “I do not think that a real estate or banking crisis in China will directly affect the Indian banking or financial system. However it can affect market sentiment in the short term. However that should not be a reason to take any investment decision,” he added.

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