Seek Drama Highlights Investors’ China Dilemma

02 Nov 2020

China’s sharemarket is too big to ignore, but it’s not easy to access for local investors. One wealth firm has taken a boots-on-the-ground approach.

Regardless of how Seek responds to a short seller’s attack focused on its investment in a Chinese classifieds giant on Monday, the episode is a reminder of an inherent challenge for Australian investors trying to ride China’s growth through ASX-listed companies.

While trading China through the likes of Treasury Wine Estates, Blackmores or Bellamy’s has delivered strong returns in the past, this trio and Seek show how hard it can be for Australian investors to predict and verify the performance of Chinese operations of ASX companies.

Consumer habits change. Regulation can shift suddenly, particularly in a time of heightened trade tensions. And in a country where even official GDP figures are taken with a grain of salt, reliable measures of market position can be hard to find.

The attack by Blue Orca asks some tough questions about whether Seek’s Chinese classifieds business Zhaopin is as strong as claimed, and Seek will no doubt defend its position. But without boots on the ground, Australian investors will probably have little choice but to decide whether they believe the company, or the short seller – verification won’t be easy.

And that’s the conundrum. Australian investors know China is a market too big to ignore, but what’s the best way in?

It’s a question that Paul Heath, chief executive of wealth advisory business Koda Capital, has examined closely in recent years, as the high net worth clients of the independent firm, which was started by Heath and former MLC executive Steve Tucker in 2014, look for returns in a world of low interest rates.

Heath argues diversification is vital, but it needs to be real diversification – not only should investors build a global diverse portfolio, but they need to find asset classes and strategies that offer uncorrelated returns.

“You have to find investments that behave differently to the S&P 500 or the ASX 200,” he says.

China’s sharemarket marches to its own beat, Heath argues. This year is a good example; while the ASX 200 is down 11.4 per cent year-to-date, and Wall Street is flat, China’s Shanghai Composite index is up 4 per cent.

But Koda’s view is that China can’t be traded from afar, such as via ASX companies with big Chinese businesses. Heath and Koda’s head of managed fund research, Jason Coggins, also says using exchange traded funds is a flawed approach, given these products tend to be dominated by China’s big state-owned enterprises and can struggle to capture the up-and-comers in particular sectors.

Since 2017, Koda’s strategy has been to use local Chinese managers that are on the ground, close to listed companies and able to spot the traps, bubbles and dodginess that, when uncovered, often seems to ensnare more foreign investors than local ones.

“We think that it’s a really idiosyncratic market and if you can find managers on the ground to exploit that you can get really exceptional results,” Heath says.

Koda’s managers have performed well. Brilliance Partners, a long/short manager, delivered a total return of 33.5 per cent between March 2019 and August this year, and 21.3 per cent since inception.

Greenwoods, which is also long/short but has more market exposure, has delivered a total return of 116.5 per cent between February 2017 and August this year, for a 24.1 per cent annualised return since inception, versus a benchmark return of 12 per cent.

Heath admits educating clients about the merits of going direct in a Chinese market that can be volatile has been an effort, as has navigating the practicalities of getting these managers on local platforms.

But he argues that clients looking to grow multi-generational portfolios in a world of low returns must think differently. Traditional defensive assets are going to be hard work, and the big tech names have become crowded trades and may not outperform either.

Hunting uncorrelated returns in a careful way – such as by using local experts in China – is about taking different risks, not more risks.

“Clients are going to have to move a little further along the risk spectrum … but to do that you have to be able to think about approaching markets from a different perspective.”


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