Rolle im Portfolio
IShares China Large Cap UCITS ETF provides exposure to 50 of the largest companies listed on the Hong Kong Stock Exchange. Foreign investors have limited access to companies listed on China's mainland exchanges; known collectively as A-shares. A much easier route to Chinese stocks has been to trade companies listed on offshore and overseas exchanges, most notably Hong Kong.
In general terms, when investing in China, one buys into state-controlled firms. These tend to be mega-cap companies enjoying oligopolistic positions in their respective industries. In the case of this exchange-traded fund, its FTSE China 50 benchmark is heavily tilted toward the financial sector, accounting for approximately half of the index's total weighting. Individual constituents are capped, but roughly 60% of total portfolio value is routinely taken up by the top 10 constituents.
Given its narrow concentration, this index does not provide a good representation of the available opportunity set in its Morningstar Category. As a result, we see this ETF more as a tactical tool for investors looking to place a short-term bet on the direction of the offshore Chinese equity market, and particularly the financial sector. Investors looking for core holdings would perhaps be better served by funds tracking more-diversified benchmarks such as MSCI China. Besides, with an ongoing charge of 0.74%, this iShares ETF is the most expensive China equity passive fund in its category.
On a three-year risk-adjusted basis, the ETF ranked in the second quartile when compared with its category peers, which also includes actively managed funds. Meanwhile, on a five- and 10-year risk adjusted basis, the ETF ranked in the third quartile. During the past three years, the ETF has outperformed the financials-heavy Hang Seng China Enterprises Index (HSCEI) but lagged behind the broader MSCI China Index.
Fundamentale Analyse
While China's GDP growth is expected to outpace that of the developed world in the medium term, it will be difficult for investors to capitalise on this opportunity via concentrated, cap-weighted, index funds such as this ETF. This is because almost all of China's largest investable companies are the products of its "state capitalist" economy. State capitalism is an economic system in which the state acts as the dominant economic player and uses markets primarily for political gain. For decades, the Chinese government has cultivated national champions, most notably in the energy and banking sectors, and then sold off minority stakes to investors both inside and outside of China. Needless to say, state interests can often trump the rights of minority shareholders.
Over the past decade, Hong Kong-listed Chinese stocks enjoyed significant valuation multiple expansion caused by earnings growth and, in hindsight, too much optimism regarding future growth. It is possible the best days of these firms have passed as the government tries to shift its growth model from capital spending to domestic consumption. Indeed, looking forward, these state-controlled firms might find their oligopolies (and profits) a little less secure. In the banking sector (which accounts for 50% of this fund), the government has been loosening its control over lending rates to stimulate competition among banks and provide more credit to the private sector. With the bulk of earnings coming from what was historically a protected spread business, China's big banks will find themselves operating in a more competitive environment. Another significant concern for the banking industry is asset quality, as banks have large loan exposure to the weakening property market, as well as to corporate clients operating in industries with significant overcapacity.
When markets began to take a sharp downturn in 2015, the Chinese government took unprecedented and aggressive steps, including buying blue chips outright, loosening margin trading requirements, banning large shareholders and company executives from selling their shares for six months, and allowing around 1,500 companies to suspend trading of their shares. Given the recent volatility and heavy-handed response by the Chinese government, foreign investors may remain on the sidelines for the time being.
Indexkonstruktion
The FTSE China 50 TR USD Index is a float-adjusted market-capitalisation-weighted index, consisting of 50 stocks that trade on the Hong Kong Stock Exchange. In 2014, FTSE extended the FTSE China 25 Index into a 50-stock index and renamed it the FTSE China 50 Index. Constituents include H shares, P Chips, and Red Chips. H-shares are companies incorporated in the People’s Republic of China and listed in Hong Kong. P Chips are companies incorporated outside the PRC but with at least 50% of their revenue or assets derived from mainland China. They are controlled by mainland Chinese individuals, with the establishment and origin of the company in mainland China. Red Chips are companies incorporated outside the PRC but with at least half their sales coming from mainland China and at least 30% of their shares held by mainland Chinese entities. All stocks are screened for liquidity and selected to represent the largest companies on the exchange. It must be noted that FTSE is considering adding China A-shares into the index. A-shares are companies incorporated in the PRC and listed in onshore exchanges like Shanghai and Shenzhen. Unlike offshore-listed shares, there are several restrictions for international investors to access A-shares. The index is reviewed quarterly. At rebalancing, all companies with a weighting greater than 4.5% cannot together make up in aggregate more than 38% of total index value. In addition, individual names are capped at 9% to ensure diversification. Weights may deviate from these caps during interim periods, but will be readjusted at each quarterly review. Financials by far make up the largest sector of the index, representing 50% to 55% of its total weighting. Other significant sector weightings include telecommunications, energy, and technology (10% to 15% each). Top holdings include China Mobile, Tencent Holdings, and China Construction Bank.
Fondskonstruktion
The iShares China Large Cap ETF uses full physical replication to capture the performance of the FTSE China 50 Total Return USD Index. The fund owns--to the extent that it is possible and efficient--all the underlying constituents in the same proportion as its benchmark. IShares engages in securities lending to enhance the fund's performance, lending up to 100% of the securities in its fund. Parent company and lending agent BlackRock covers the operational cost involved in securities lending for a 37.5% stake in the revenue generated from this activity, while the fund keeps 62.5%. In the 12 months to the end of June 2016, the fund lent out 23.1% of its assets under management on average, with a maximum on-loan of 27.7%, generating a return of 0.12%. Securities lending exposes the fund to counterparty risk, that is, the possibility that the borrower will not return the securities it borrowed. To manage this risk, BlackRock takes collateral greater than the total loan value. Collateral levels vary between 102.5% and 112%. Acceptable collateral includes: equities (up to 40%), government bonds, and, in some cases, cash. In addition, BlackRock provides default indemnification. If a borrower defaults and fails to return borrowed securities, BlackRock will replace them. The indemnification agreement is subject to changes without notice.
Gebühren
The fund's ongoing charge of 0.74% makes this the most expensive ETF in its Morningstar Category. The analysis of the annualised tracking difference (fund return – index return) for each of the past three years (for the period ended June 2016) shows that the total annual holding cost can be higher or lower than the ongoing charge. Other costs potentially carried by the unitholder include bid-ask spreads and brokerage fees when buy and sell orders are placed for ETF shares.
Alternativen
Chinese stocks are listed on exchanges globally, markedly in mainland China, Hong Kong, and New York. Investors seeking exposure to Chinese equities via ETFs are strongly encouraged to scrutinise the ETF's index of reference so as to ensure they really get the exposure they seek.
As of this review, the only directly comparable alternative to this iShares fund is the db x-trackers FTSE China 50 (DR) 1C ETF. Also physically replicated, it has a lower ongoing charge of 0.60%.
Investors can also look to ETFs tracking the HSCEI index. The caveat is that financials account for approximately 70% of the portfolio. ComStage (ongoing charge 0.55%) and Lyxor (0.65%) are the only providers offering exposure to this benchmark.
Investors seeking broader exposure may want to consider funds tracking the MSCI China Index. With 151 constituents covering about 84% of the non A-share listed Chinese equity market, MSCI China is more diversified at the security level than FTSE China 50 and HSCEI. This fund is also skewed toward financials, but to a lesser extent (normally around 30%).
A few providers also offer ETFs with exposure to China's investable A-share market, including funds tracking the FTSE China A50, MSCI China A, and CSI 300 benchmarks. Ongoing charges for these ETFs vary from 0.40% to 0.99%, with Lyxor's CSI 300 A-Share ETF at the low-end of the range.
Investors interested in sector-specific A-share market exposure may consider db x-trackers' range of CSI 300-tracking ETFs covering the likes of transportation, healthcare, and consumer discretionary. All of these funds charge an ongoing charge of 0.50%.
