Both the funds under review use the MSCI Golden Dragon Index as a benchmark which the funds compare their performance against. The MSCI Golden Dragon Index tracks Chinese companies that non-Chinese citizens can buy into which are listed in exchanges in HK/China as well as in other parts of the world eg Taiwan, Singapore, US.
Both the funds also have 10-year track records which is a good long-term timeframe to look at.
The following are the respective fund returns sourced from Morningstar and MSCI.
GCEF did better overall than PCSF
For both the funds, 3 & 5 year returns outperformed the benchmark while 1-year underperformed. PCSF underperformed for 10-years while GCEF just managed to perform in line. GCEF provided overall better returns than PCSF except for 1-year which IMO is too short a timeframe for objective assessment.
PCSF severely underperformed in the 10Y timeframe
10Y: PCSF delivered only 3.6% p.a. over the last 10 years compared to the benchmark which produced 6.8% p.a. This is a severe and unacceptable underperformance. GCEF did much better than PCSF but even then just managed to eke out benchmark returns in the 10-year category.
5Y: PCSF managed to outperform but just barely at 0.2% points above benchmark. GCEF gave a comfortable outperformance.
3Y: Both funds outperformed decently with GCEF giving more than 3% points over benchmark.
I’m not as comfortable following the 3 to 5-year timeframes as it suggests a requirement for trading which raises costs and calls for an element of luck.
Adjusting for sales fees worsens returns
You can’t get into these funds for free. You need to pay an agent or an advisor to buy into any funds. The going rack rate for these funds according to Morningstar is 5.5% for both funds paid only once at the point of purchase.
Adjusting for one-off sales fees gives massive leaks to returns.
10Y: Both funds underperform with PCSF’s becoming even more pronounced. GCEF went from an in-line before sales fees to a slight underperformance.
5Y: PCSF underperforms. GCEF loses outperforming edge.
3Y: GCEF still very decent. PCSF gravitates closer to benchmark returns.
1Y: While I’ve mentioned that 1 year isn’t an objective assessment period, this shows the ludicrousness of holding your fund for just a year or under due to expensive sales fees.
Are there alternatives?
The following table provides a variety of viable ETF alternatives you can look at should you wish to get exposure to China.
Most of these ETFs are based on the MSCI China Index (which excludes Taiwan listings) rather than the Golden Dragon but return differences seem to be slight except for 10 years.
Most of the ETFs also don’t have a 10-year track record but returns hug the benchmark within 1% point thereabouts.
These passive ETFs also give the active, professionally-staffed PCSF and GCEF a good run for their money primarily due to their negligible entry costs and absence of sales fees.
I’m not saying this is exhaustive research, I’m just giving examples of how active funds can often find it hard to beat either relevant indices or index-based funds.
Note: The PGJ is an outlier as it invests only in Chinese stocks listed in the US which means it is predominantly a Chinese tech play, hence the wild outperformance. As with all investments, do seek advice before investing.
PCSF and GCEF seem to have superior risk-adjusted returns
Maximising returns and minimising risks is the holy grail of investing. I view this as the degree of “stress” you have to go through, keeping you awake at night, in order to chase your desired returns.
It does appear that the actively managed PCSF and GCEF do seem to provide superior risk-adjusted returns i.e. higher returns at lower risk for the 3-year period as measured by the Sharpe ratio.
However, I don’t at this point know how to fully read into this data which are provided by Morningstar. The stats for the Malaysian funds only cover the 3-year period which is for both PCSF and GCEF their best timeframe and as the refrain in finance goes, past performance may not indicate future performance. I’m also not sure what the “risk-free rate” being used is, plus the returns are probably not adjusted for sales charges. Anyhow, they seem pretty good.
Here are the rest of the specs for the funds under review.
FeesSales fees: Rack rates for PCSF and GCEF are equally expensive.
Management expense ratios: This includes the cut going to the fund manager for managing your fund. PCSF at 1.6% isn’t cheap but GCEF is pricier – 2% or more a year is no joke and can take a toll on returns over the long term.
There’s an added transparency issue for GCEF as it is a “feeder fund” i.e. its sole investment is into the Schroder International Selection Fund – Greater China (itself a pricey fund) which seems to have provided decent enough returns except that investors have to do some extra digging and add the costs of the target fund into GCEF’s to get the total costs. The guys at CIMB have been really helpful in kindly guiding me in this respect and also pointing out that SC prohibits the charging of management fee twice. So what is happening here is that the target fund rebates the overlapping management fee to GCEF but takes a cut for management fee. One easy way to look at this is to use the formula Gross Mgt Fee + Other Expenses + Cut to Target Fund, which will come up to 2-2.3%.
All the funds under review provide a snapshot of what they invest in except for PCSF which is concerning. I don’t want to say PCSF (and the rest of Public Mutual funds) may have violated SC unit trust guidelines by omitting such info but I think this is a point to clarify further.
GCEF holds two-thirds fewer stocks than the ETFs which is normal for an active fund which bets on beating the benchmark. But this may create a kind of “my life is in your hands” situation if the fund manager makes big, emotional bets in certain stocks which GCEF’s target fund doesn’t appear to be doing. With PCSF, we have no clue.
The active funds also hold a lot more cash than the ETFs. At such low levels, these are more for smoothening purposes (creating and redeeming units) rather than market directional bets. Regardless, I can’t help but think that cash held for smoothening is akin to old unit trust holders funding newer ones and I don’t like that because here are precious funds lost to limited returns. For GCEF’s target fund, the latest cash number is 1%.
Portfolio turnover: PCSF at 23% isn’t high but still a lot higher than almost zero for the ETFs. GCEF’s 42% are all attributed to unitholder activity rather than the fund manager’s restless trading fingers since GCEF puts all money into the target fund. However, I can’t seem to get hold of the PTO number for the target fund.
Fund value traded/implied brokerage fee: This is interesting because the implied RM325m in value traded by PCSF is huge for any bunch of brokers. But PCSF withholds breakdown of its broker list which is another possible violation of SC guidelines and scores lousily in the transparency department. Did PCSF conflictingly favour any broker at the expense of unitholders? We don’t know.
PCSF’s implied estimated brokerage rate of 0.36% is quite high. You’d think that with that kind of clout, a rate of 0.1-0.2% or below can be squeezed out of brokers, I mean, even personal online trading accounts can offer rates of 0.1-0.2% at higher volumes, what more with a gigantic fund house like Public Mutual. The brokerage savings can add back say 0.15% to annual returns… goes a long way in offsetting sales fees.
These metrics are irrelevant for GCEF which invest all money into the target fund.
PCSF: A pricey fund which grossly underperformed over the long-term. Many issues exist in the transparency department which can potentially foster higher expenses.
GCEF: Also quite pricey but managed to produce by the skin of its teeth benchmark returns in the long-term. But there’s the comfort of British gwailo or mat salleh transparency in the target fund. However, it’s still an irritation, like an itch you can’t quite scratch, having to monitor two funds.
Both funds managed to secure higher returns with lower risks in the 3-year period but info for the longer term is unavailable.
Similar ETFs also seem to provide comparable returns cheaply and reliably.
More importantly, you have to ask yourself whether a China fund is suitable for you. China only contributes 15% to the world economy and while still growing strongly, is an economy in transition. MSCI’s ACWI index which tracks developed and emerging markets only gives China a 3.4% weighting.
Are you eating too much Dim Sum in your world of a balanced diet?