Despite significant volatility, Chinese stocks continue to hold appeal as a component of long-term portfolios. One of the oldest and most popular vehicles for achieving access to the Chinese stock market is the Matthews China Fund (MCHFX), which launched in 1998 and has grown to approximately $1 billion in assets. The charts below highlight the key characteristics of MCHFX.
Better Exposure
Though indexing strategies have become increasingly popular — there is more than $11 billion in China stock ETFs — active management in this asset is appealing due to the complexities that make the creation of a rules-based index that offers broad exposure challenging.
Firstly, most China stock indexes tend to be dominated by a small handful of mega-cap state-owned companies. MCHFX, by comparison, has the flexibility to include smaller stocks in its portfolio as well.
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Data Source: Matthews. As of June 30, 2015.
Another common bias among China indexes and funds comes at the sector level. The largest Chinese companies are banks and insurance companies — many of which are controlled by the government — so passive products tend to have a huge allocation to the financials sector. Again, active management gives some flexibility in tweaking the portfolio toward sectors that may maintain more substantial long-term growth potential.
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Data Source: Matthews. As of June 30, 2015.
China is unique in that there is a dizzying array of share classes; some are listed on the primary Hong Kong exchange and denominated in Hong Kong dollars while others are listed in Shanghai or Shenzhen and denominated in the local renminbi. Whereas most China strategies focus on a specific type of shares, MCHFX includes various types of stocks:
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Data Source: Matthews. As of June 30, 2015.
Cheap and Easy Access
MCHFX makes the tilts highlighted above that result in a more balanced and diversified portfolio. The cost of these tweaks is manageable; the fund charges 1.13 percent annually and has a minimum investment of just $2,500. The most popular China ETF, FXI, charges 0.74 percent annually.
Also noteworthy is the relatively low turnover of the fund — only about 10 percent in 2014. So the managers aren’t aggressively buying and selling stocks, but rather making occasional changes to the portfolio.
Performance
While the ability to customize a more diversified and flexible China strategy is certainly appealing, the real driver of the interest in MCHFX is likely the track record. Though the fund has lagged behind its benchmark over the past few years, it has outperformed by a wide margin since its inception:
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Data Source; Matthews. As of June 30, 2015.
When selecting a mutual fund or ETF to access asset classes such as Chinese stocks, it is easy to look exclusively at historical performance. Investors would be better off taking a look under the hood and examining the composition of the portfolio, and selecting a product that offers diversified exposure at a reasonable price.
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