China investments

JohnWinder

MaxiRobriguez said:

Developed world tracker would be enough to suit the majority of investors, giving a good return through reasonable diversification.

Absolutely do not "need" China in a portfolio, and thinking about it I might try and reduce my allocation over time as I don't need the large returns that I seek from EM in order to meet my portfolio goals.

First paragraph suggests faith in index investing. Good choice with a broad index as diversification is a 'free lunch'.

Second paragraph suggests faith in stock picking which is a bit antithetical to passive investing. Of course, we can have it both ways without being wracked with guilt. But is there another way?

It can't be the large returns you anticipate from EM that puts you off; it is surely the volatility. So an alternative is keep the EM, reduce you total stocks holding, and increase the bonds. Result: 'same' risk level; better diversification.

Thrugelmir

JohnWinder said:

MaxiRobriguez said:

Developed world tracker would be enough to suit the majority of investors, giving a good return through reasonable diversification.

Absolutely do not "need" China in a portfolio, and thinking about it I might try and reduce my allocation over time as I don't need the large returns that I seek from EM in order to meet my portfolio goals.

First paragraph suggests faith in index investing. Good choice with a broad index as diversification is a 'free lunch'.

Second paragraph suggests faith in stock picking which is a bit antithetical to passive investing. Of course, we can have it both ways without being wracked with guilt. But is there another way?

It can't be the large returns you anticipate from EM that puts you off; it is surely the volatility. So an alternative is keep the EM, reduce you total stocks holding, and increase the bonds. Result: 'same' risk level; better diversification.

Sounds about as effective as relying on Tesla's autopilot system while on the M25 in the evening rush hour.  

Alexland

JohnWinder said:

It can't be the large returns you anticipate from EM that puts you off; it is surely the volatility.

The issues raised by investing in China go beyond volatility and stray into areas including if as an overseas shareholder you are really buying a proportion of the control of the company. There were a few articles recently questioning how L&G could offer an ESG China government bond fund given human rights and environmental positions. 

MaxiRobriguez

JohnWinder said:

MaxiRobriguez said:

Developed world tracker would be enough to suit the majority of investors, giving a good return through reasonable diversification.

Absolutely do not "need" China in a portfolio, and thinking about it I might try and reduce my allocation over time as I don't need the large returns that I seek from EM in order to meet my portfolio goals.

First paragraph suggests faith in index investing. Good choice with a broad index as diversification is a 'free lunch'.

Second paragraph suggests faith in stock picking which is a bit antithetical to passive investing. Of course, we can have it both ways without being wracked with guilt. But is there another way?

It can't be the large returns you anticipate from EM that puts you off; it is surely the volatility. So an alternative is keep the EM, reduce you total stocks holding, and increase the bonds. Result: 'same' risk level; better diversification.

I am a fan of both passive and active investing - the suitability depends on the investor. Note my first paragraph says a developed world tracker would suit most investors. My second paragraph mentions my portfolio. To be really transparent, about 50% of my money is in bog standard cheap passive funds, with the remaining 50% split between active funds in targeted areas (like my Chinese fund) and individual stocks which I pick. That suits me, but probably won't suit most, who should stick to simpler strategies. 

RE: what puts me off China - not the volatility, quite happy to ride that out, but the political risk and as Alex says what you're actually buying into in terms of shareholder rights, and that question mark hangs over it more than it would otherwise would as I don't necessarily need large gains - I will meet my targets with a 4% real (after inflation) annual portfolio return rate over the next 17 years, so I don't need outsize gains, but I am in overweighted in China due to previous comments re: perceived cheapness, how many customers these companies have etc.

On a completely unrelated note, I kicked off a pension merge the other week which sold out assets on Friday and re-purchased them yesterday, and the biggest fund in that process was an EM fund which was China heavy, so through sheer blind luck I've managed to dodge the entire ~14% two day sell-off and benefit from the +7% gains overnight.

JohnWinder

Since it's not the volatility but the morality of investing in certain parts of the world, hats off for your stand. But can you make your 4%/year real for 17 years while turning your back on possible 'outsize gains'?

I'm not one to put too much credence on point estimates of returns in the next decade, but Vanguard is 'forecasting' 4%/year nominal for US equities, and 7%/year nominal for non-US equities for the next 10 years. Bonds, more like 1%/year. Can you take the risk of having a risky enough portfolio to make 4%/year real during the last 5 or 6 of your 17 years, at a time when your investments might not have time to recover from a (in-)decent fall? If not, you'd need to de-risk your portfolio at the 10 year mark, or thereabouts; does that mean you need more than 4%/year real for the first 10 years or so?

csgohan4

The latest news on China's regulatory clampdown is worrying. I have exposure via a Pacific ex japan fund which makes up around 20% of this fund and a small amount in a china fund which I am liquidating to put into some recovery stocks which are on the way up

I am also doing the same with a small American fund as well, as I am also not convinced it has far to go before it pops, Still >20% profit, but my risk appetite is making me nervous. 

MaxiRobriguez

JohnWinder said:

Since it's not the volatility but the morality of investing in certain parts of the world, hats off for your stand. But can you make your 4%/year real for 17 years while turning your back on possible 'outsize gains'?

I'm not one to put too much credence on point estimates of returns in the next decade, but Vanguard is 'forecasting' 4%/year nominal for US equities, and 7%/year nominal for non-US equities for the next 10 years. Bonds, more like 1%/year. Can you take the risk of having a risky enough portfolio to make 4%/year real during the last 5 or 6 of your 17 years, at a time when your investments might not have time to recover from a (in-)decent fall? If not, you'd need to de-risk your portfolio at the 10 year mark, or thereabouts; does that mean you need more than 4%/year real for the first 10 years or so?

It's not morality either, it's the outsize political risk which may impact on shareholder returns for shareholders of Chinese companies. But at the moment I'm 15% of my portfolio in China, it's just whether I want to taper that. We'll see. 

4% over 17 years I think is appropriate. US markets are expensive yes and I think will underperform but I'm underweighted there. Even if equities underperform for the full 17 years, as long as they then overperform the 4% real return for the next few then I should be OK.

Will need to stress test later down the line. At the moment I'm just shovelling in as much cash as I can so there's not a lot more I can do to improve my chances.

Alexland

JohnWinder said:

I'm not one to put too much credence on point estimates of returns in the next decade, but Vanguard is 'forecasting' 4%/year nominal for US equities, and 7%/year nominal for non-US equities for the next 10 years.

Yup if filtering out countries or companies on ESG criteria the danger is you end up with a greater sector, growth and country weightings than already exists in a cap weighted global index in particular the US tech companies which seem to pass most criteria become even more dominant in your portfolio.

I doubt you would like it but taking a more active approach to asset allocation can rebalance the sector and country allocations to improve the diversification. Simple things like adding an ESG filtered or weighted UK or Europe bias would help. You might be within a reduced universe of acceptable investment options but it should be workable and generate acceptable long term returns especially given that at the moment those valuations are looking reasonable.

Thinking ahead ESG issues are probably the greatest risk to achieving our long term investment objectives as it seems likely governments (even China) will eventually need to take some hard actions to manage the impact of climate change and as we have seen from the pandemic response that can badly impact poorly positioned companies.

At the moment we only have 2 investments with an ESG element (one actively underweighting them if they are not long term sustainable industries and another passive but excluding them based on criteria) but I expect that will increase over time and represents the overall direction of our portfolio. We almost certainly would have done fine if China had never opened the backdoor to investment so it should be fine to filter them out even if in some years as Terry Smith found with FEET that leads to lower perfomance.

Thrugelmir

JohnWinder said:

Since it's not the volatility but the morality of investing in certain parts of the world, hats off for your stand. But can you make your 4%/year real for 17 years while turning your back on possible 'outsize gains'?

I'm not one to put too much credence on point estimates of returns in the next decade, but Vanguard is 'forecasting' 4%/year nominal for US equities, and 7%/year nominal for non-US equities for the next 10 years. Bonds, more like 1%/year. Can you take the risk of having a risky enough portfolio to make 4%/year real during the last 5 or 6 of your 17 years, at a time when your investments might not have time to recover from a (in-)decent fall? If not, you'd need to de-risk your portfolio at the 10 year mark, or thereabouts; does that mean you need more than 4%/year real for the first 10 years or so?

Seems a broad general observation. With no particular connection to China. 

Alexland

U.S. regulator freezes Chinese company IPOs over risk disclosures

https://www.reuters.com/business/finance/exclusive-us-regulator-freezes-chinese-company-ipos-over-risk-disclosures-2021-07-30/

SEC commissioner Allison Lee said on Tuesday that Chinese companies listed on U.S. stock exchanges must disclose to investors the risks of the Chinese government interfering in their businesses as part of their regular reporting obligations.

I guess they will have to add that into a big document that nobody bothers reading.