Focus on A-share value, not volatility, says China JV chief

Volatility in the A-share market should start to ease next month, while reasonable valuation levels mean it’s a good time to invest in Chinese stocks, says the CEO of BNY Mellon Western Fund Management Company.

Hu Bin’s views should not come as a total surprise, given that the joint-venture is preparing to launch its first equity fund for domestic retail investors on December 20, having recently obtained approval from the China Securities Regulatory Commission.

But Hu is confident that late December is a good time to launch the BNYMW Multi-Strategy Fund. While the A-Share market will remain volatile in the near term, he expects uncertainty to be eased after the Central Economic Work Conference is held early next month. The event will address the government’s main economic tasks and set the tone for monetary and fiscal policies in 2011.

“How long the volatility persists will depend on how the market prices in the [monetary] policy change and the government’s stance on curbing inflation,” he says, referring to the recent move by the People’s Bank of China to raise one-year lending and deposit rates by 25 basis points.

Regardless of the rise in rates, Hu argues that for investors with a long-term view, now is a good time to invest in domestic stocks, given the country’s powerful economic growth, ample liquidity and what he sees as reasonable stock valuation levels. CSI 300 stocks are currently trading at 19 times price-to-earnings multiples, while the historical average is 25 times. 

Hu explains that the multi-strategy fund will utilise a four-pronged investment approach: asset allocation, sector rotation, stock selection and index futures. “The A-share market often exhibits a strong sector-rotation pattern,” he adds. Sector rotation is an investment strategy involving the movement of money from one industry sector to another with the aim of beating the market.

The fund will be one of the first batch of mutual funds to adopt index futures for hedging purposes, notes Hu, who gained experience using the tool when he managed funds in the US.

Beijing approved the use of index futures back in April this year, although it’s still rare for mutual fund managers to include them in their investment portfolios.

When asked about the size of the forthcoming fund, Hu declines to give an estimate and says only that the company will keep it to a manageable size. “We want to make sure our first fund renders good results so that it will become our flagship product,” he adds.

The fund will be managed by Yan Xu, deputy CIO of BNY Mellon Western and formerly a fund manager with Fortune SGAM FMC. China Construction Bank will act as custodian bank.

The joint-venture between BNY Mellon and Western Securities was established in July 2010, with a share split of 49% and 51%, respectively, and Rmb200 million ($30 million) in registered capital. Western Securities has 56 branches in China to aid distribution. 

Initially the company’s priority is “quality rather than quantity”, says Hu, referring to its aim to provide well performing products rather than to grow AUM rapidly. “Though BNY Mellon is a well-known brand internationally," he adds, "it still takes time to build a good image in China.”

Over the next three years, the company will concentrate on constructing a full suite of products, with a balanced fund to be launched next year, and building a good brand image domestically. The long-term goal is to get the company into China’s top 10 asset management firms.

Beside mutual fund products for domestic retail investors, BNY Mellon Western also plans to offer QFII products to serve international clients.

BNY Mellon Asset Management International obtained a QFII licence in November last year but is still awaiting quota confirmation from the State Administration of Foreign Exchange. BNY Mellon Western is expected to play a prominent role in the investment of this QFII fund.

Hu says that the company will put its QFII quota to work in domestic stocks for investors from Japan, Hong Kong, Southeast Asia, the US and Europe.