There’s no doubt Australia’s prosperity in recent times is linked to the rise of China from developing nation to global powerhouse. Vaneck’s China New Economy (CNEW) ETF aims to capitalise on the rising affluence in China.
There’s no doubt Australia’s prosperity in recent times is linked to the rise of China from developing nation to global powerhouse. China’s demand for Australia’s raw materials to catch up on 100 years worth of infrastructure builds in a short 20 year period, saw Australia reap the rewards in the first part of the 21st century.
Any visitor to a large Chinese city in the last few years will see a sky littered with cranes, streets full of global fast food chains, high end fashion stores and a growing affluent and middle class. Today we look at this change in the makeup of China, and how VanEck aims to capitalise on this through their China New Economy ETF (CNEW).
According to Vaneck, traditionally, economies like China have been dependent on financials, energy and materials. As GDP per capita has increased, domestic policy and reform has been focused on transitioning the economy to be consumption led, with four forces behind this transition with consumer focused sectors gradually replacing heavy industry and low cost manufacturing as the country’s economic engines.
These four forces are identified as:
CNEW invests in 120 companies that meet the China New Economy definitions as created by the index, the CSI MarketGrader China New Economy Index (AUD). The companies invested in belong to the consumer discretionary, consumer staples, healthcare and technology sectors.
The Index seeks to identify the companies in China with the best ‘growth at a reasonable price’ (GARP) attributes which are considered the best drivers of long-term capital appreciation. Companies are selected on the basis of the strength of 24 fundamental indicators across the four categories of growth, value, profit and cash flow.
CNEW’s sector weightings currently consist of a 24% weighting to food, beverage and tobacco, 20% to biotech and phamaceuticals, 15% to consumer goods and apparel and 5% to software.
The top 10 holdings won’t be recognisable to most Australians. With an equal weight mandate, no individual company makes up more than about 1% of the portfolio value. Companies such as Kweichow Moutai, creater of Maotai, a popular Chinese alcohol, Shandong Xiantan, a food processing company, including creating soybean oil and chicken breeder Fujian Sunner Development all land in the top few holdings.
With only a few months of history, CNEW doesn’t yet have the track record to meaningfully analyse performance. The CSI Marketgrader China New Economy Index, which CNEW tracks has a base date of December 2007, giving it a relatively long track record. The index has seen impressive returns to date, with 257% total return (in US Dollars) since the 2007 inception according to the Marketgrader website.
It has however been a pretty wild ride for this index, with its best year returning 130%, its worst year almost -50%, and large positive and negative swings almost every year. Investors in developing economies like China need to have the nerve to ride these rollercoaster returns.
Somewhat surprisingly given our close relationship with China, and large number of Chinese immigrants, there’s not a huge amount of Chinese focused ETFs available to Australian Investors. The lack of options can likely be traced back to China’s reasonably close Communist system ansd immature equity markets.
Veneck’s ChinaAMC A-Share ETF (CETF) provides a more diversified exposure to Chinese companies, targeting the 300 largest and most liquid stocks in the Chinese A-share market. iShares China Large-Cap ETF (IZZ) is the only other Chinese focused ETF, targeting a pool of large cap companies that operate on the Hong Kong Stock Exchange.
Beyond China, the options become more abundant, with a total of 17 ETFs and LICs focusing on Asia.
The Vaneck Vectors China New Economy ETF was launched in November 2018. At the time of writing it has around $13m assets under management. Management costs are 0.95% per annum, with the fund paying distributions annually.