Do i need a China fund in my portfolio??

C_Mababejive

Just that really,,
In my portfolio i have a global tracker, A strategic bond fund ,CTY and sadly BCPT.
The global tracker is L&G international index trust.
As China is so big and has such a huge economy, i wondered whether the global tracker was enough to cover it or do i need to increase my exposure to China? Maybe the strong trading and investment links between the rest of the world and China are already represented within the global tracker?

83705628

Short answer: no
Long answer: still no
Very long answer: why?

83705628

The companies in a global equity tracker already have plenty of exposure to the Chinese economy, thank you very much. And China is a weird country with different indices offering very different performance https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/csri-summary-edition-credit-suisse-global-investment-returns-yearbook-2019.pdf&ved=2ahUKEwin-diDu97qAhXNT8AKHaHVDtIQFjADegQICBAB&usg=AOvVaw17kbMbWvVsop8m66Pc5paY&cshid=1595338559181

bowlhead99

China is not really represented in the FTSE World (ex UK) index tracked by your L&G product because it is an emerging market, and the FTSE World (as distinct from FTSE All-World) doesn't include Emerging markets (although it does include some 'advanced emerging' economies such as Brazil, Mexico, Taiwan).

So your exposure to 'china-ish' investments would only be through the ~3% of that World-ex-UK index which is allocated to Hong Kong or Taiwan, or to other global companies which have export sales to Chinese businesses or individuals or who have subsidiaries over there.  It wouldn't include giants like Tencent or Alibaba, retailers such as Meituan Dianping or JD.com, banks like ICBC or China Construction Bank. Those six companies would be a trillion dollars of market cap between them if you were using an 'all world' tracker that included them.  Although a trillion dollars of market cap is perhaps not a lot in the context of 50 trillion in the rest of the developed and emerging world, depending on your perspective.

IMHO excluding China and only relying on other companies in the region or globally that sell to the Chinese is a mistake for the reason you say - they have a huge economy.  For example, a global business might buy lots of things from the Chinese - but that is the opposite of getting exposure to chinese assets and business profits, it is paying for chinese profits, because those profits appear as costs to their non-China customers that you'll own. China has a positive balance of trade in terms of selling more things than it buys. 

However when you look at trying to invest there, a lot of Chinese businesses are state or family-operated, and a large proportion of the 'investible-to-foreigners' market cap in China is concentrated in just those few $50bn+ companies I mentioned. So using a China index to add exposure would not give you a very balanced allocation and perhaps a general 'emerging markets' or actively managed China or Asia fund may be more suitable.

Prism

You don't need one but if you did go this route then maybe consider an emerging markets fund which would typically be around 35% China. You would likely need to hang in for the long run as emerging markets tend to go nowhere for years then have a huge burst with some significant drops in there too. For what its worth I allocate up to 20% to emerging markets and it hasn't paid off yet.

C_Mababejive

Thanks once again for everyone's input and the very comprehensive and measured response from Bowlhead.. Of course im far from being expert and so i felt that though China was big it was also different and perhaps more volatile hence the reason why my search for China funds didnt pull that much up. The question is often asked what is my goal for investment ,,and quite simply its to learn more, grow capital and legally avoid as much tax as possible. I'm also getting to grips with the data which my provider pushes out about my portfolio..stuff such as correlation indices and other charts and data. If anyone has any suggestions for an investment that might sit well alongside my existing group then it would be great.

I forgot to mention that i also have HSBC FTSE All world and i know its a close match for the L&G fund but i figured id split my global tracker investment between the two .

83705628

If you wanted you could swap the L&G fund for something like vanguard FTSE global all cap which is about 10% emerging markets.
Below is humble opinion.
China is incredibly corrupt, they have no consistent reporting, the state owns or has an indirect say in everything, they have terminal demographics, complete export and capital dependancy, complete OPEC dependancy, they have pretended to care about foreign investors for decades but only as long as it suits the states political goals. I wouldn't touch a China fund, either active or index, with a barge pole.
So the answer to question of whether a UK investor "needs" to invest in China is no.

83705628

C_Mababejive said:

Thanks once again for everyone's input and the very comprehensive and measured response from Bowlhead.. Of course im far from being expert and so i felt that though China was big it was also different and perhaps more volatile hence the reason why my search for China funds didnt pull that much up. The question is often asked what is my goal for investment ,,and quite simply its to learn more, grow capital and legally avoid as much tax as possible. I'm also getting to grips with the data which my provider pushes out about my portfolio..stuff such as correlation indices and other charts and data. If anyone has any suggestions for an investment that might sit well alongside my existing group then it would be great.

I forgot to mention that i also have HSBC FTSE All world and i know its a close match for the L&G fund but i figured id split my global tracker investment between the two .

/
Ah, the L&G fund is developed ex-UK, the all world buys everything.
Nah you're doing fine. I could talk to you for hours about why you should upweight your UK allocation but if you're sticking with global your really don't need to use more than 1 fund, aside from rare incidents like problems with a fund manager.

george4064

I tend to agree with others that on average it would be foolish to exclude China from your portfolio, and again similar to others I have exposure to China via a broader emerging markets fund.

I actually hold JPMorgan Emerging Markets Investment Trust PLC which has about 39% in China. At a portfolio level that equates to circa 3.9% exposure of my entire portfolio in Chinese equities which I'm comfortable with.

EDIT: Just realised that my Asia Pacific IT also has some exposure to China but its minimal at the fund level and virtually unnoticeable at overall portfolio level.

83705628

george4064 said:

I tend to agree with others that on average it would be foolish to exclude China from your portfolio, and again similar to others I have exposure to China via a broader emerging markets fund.

I actually hold JPMorgan Emerging Markets Investment Trust PLC which has about 39% in China. At a portfolio level that equates to circa 3.9% exposure of my entire portfolio in Chinese equities which I'm comfortable with.

/
3.9% seems acceptable, about the sameasyou'd get in that HSBC FTSE all world fund.

bowlhead99

tcallaghan93 said:

george4064 said:

I tend to agree with others that on average it would be foolish to exclude China from your portfolio, and again similar to others I have exposure to China via a broader emerging markets fund.

I actually hold JPMorgan Emerging Markets Investment Trust PLC which has about 39% in China. At a portfolio level that equates to circa 3.9% exposure of my entire portfolio in Chinese equities which I'm comfortable with.

/
3.9% seems acceptable, about the sameasyou'd get in that HSBC FTSE all world fund.

Yes, just a different allocation, as they'll use judgement in the JPM active fund versus an HSBC or Vanguard index approach of just taking the index allocations within the world tracker (the latter being a cheaper way to do it, but picking up all the chaff with the wheat). 

As it happens, JPM really like Alibaba and Tencent so they account for about 40% of the China money within JPM's emerging fund, while those companies only represent 32% of FTSE's China allocation within an Asia or Emerging or All-World tracker.  Still, even if JPM's EM fund were 10% of your portfolio and 40% of it was China and 39% of that was those two companies, the percentage of your portfolio that ends up in the two companies combined would only be about 1.5%.   Whereas if you used an All-World tracker to give your allocation (and still had approx 4% in China by following that route), you'd have about 3% in each of Apple and Microsoft which is a pretty significant concentration too. 

There's no definitive reason for Tencent or Alibaba to do any worse than (e.g.) Apple over the next decade.  Though the points about poor legal structure, corporate governance and political influence in China are quite valid.  (obviously Apple's fortunes aren't entirely immune to political interference either).