Meet the Manager

The opening up of the Chinese equity market is one of the biggest question marks and opportunities that investors have today.

Eight trillion US dollars market cap of A-share stocks will enter the international indices for the very first time this year—starting a little bit, but over time it’s going to be a very large part of what everyone does. And it’s a big deal because, frankly, when was the last time in anyone’s career that 8 trillion US dollars of stocks moved from under the radar screen into the investable universe? And so over time, we think that’s going to change the way people look at investing into emerging markets overall. And also a substantial amount of asset owners will probably start thinking about having a stand-alone China allocation as a way to invest into the region.

China would be the second largest equity market in the world. So the Chinese stocks that we are all familiar with today, they are already in the global benches. There are about 3, 3 and a half trillion US dollars in total market cap. But the A-shares—the stocks they’re selling in Shanghai and in Shenzhen—are a bit over 8 trillion US dollars. You can construct a really interesting portfolio from Chinese companies on a stand-alone basis.

To us, the Chinese market is one of the least efficient markets in the world today. Now let’s take a look at the A-share market specifically. Eighty-six percent of that market in 2017 on a free-flow market-cap-adjusted basis are retail investors. These are mom-and-pop investors. The market—because of the dominance of the mom-and-pop retail investors—the market is so inefficient, is so immature, it’s just a great place for investors like ourselves to generate returns. But there’s a downside to this. A large number of retail investors in the market also tend to create higher volatility. But China A-shares tend to have a very low correlation with the rest of the world, actually, because the A-share investors do what they do on their own. So by combining A-shares with offshore China stocks, what you ended up getting is actually a lower volatility.

One of the things I love to do is gardening. When you are growing something, you know, it’s not as if you sow the seeds and then a couple of days later it’s done. And it requires a bit of patience and sometimes requires a bit of luck with weather. But invariably, if you persist, it pays off. I think there’s that similarity between growing, or at least urban gardening, and investing into China.