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Frontier Markets – Neptune China



It’s thought that single country equity funds investing in China have attracted around $50 billion of capital inflows since 1995. As the world’s second largest economy − and the ‘C’ in the ubiquitous BRIC – China is not an obvious frontier market. But upon closer inspection, most of the money has gone into the Hong Kong listed H-shares used by global index providers such as MSCI and FTSE.


The A-shares traded on the mainland stock exchanges of Shanghai and Shenzhen have historically been much more difficult for international investors to access. But things are about to change as the Chinese government is planning to increase its quotas to allow foreign investors to hold up to 15% of the free float rather than the current 1.3%. This would eventually enable these shares to be included in the main global indices.


A move like this would be expected to have a beneficial impact on funds like Neptune China, which is benchmarked against MSCI China and could see a wave of new money and a significant increase in its investible universe. Over the last 5 years it has returned 16.8%, which puts it just outside the first quartile of the 37 funds in the IMA China/Greater China sector. Those who invested when it launched in December 2004 would have enjoyed a gain of 194%, although this is well behind the 271% achieved by its benchmark.


The managers, Douglas Turnbull and Robin Geffen (who founded Neptune Investment Management in 2002), use the company’s economic and sector research to position the fund in areas that they believe have the greatest exposure to domestic and international growth themes. These include: continued economic restructuring, infrastructure development and the rising spending power of the Chinese middle class. As a result, the main portfolio weightings are: Financials 30.4%, Consumer Discretionary 16.8%, Industrials 12.2%, Energy 11.6% and IT 10.7%.


Neptune China is positioned for a modest Chinese recovery and recent data suggests that this may be the right approach with various economic indicators turning positive after an 18-month slowdown. Turnbull and Geffen see good value in the market and are fully invested in what they consider to be high quality sector leaders. If the economy continues to pick up the fund should deliver a decent return.


Fund Facts

Name:                                                  Neptune China fund

Type:                                                  OEIC

Sector:                                                 China / Greater China

Fund Size:                                           £83.9m

Launch Date:                                       December 2004

Portfolio yield:                                    0.47%

Initial Charge and AMC:                    5%, 1.75%

Manager:                                             Neptune Investment Management