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Chinese opportunities for SKAGEN Kon-Tiki

From Friday 1 June, China’s A-shares entered the MSCI Emerging Markets Index and this is expected to lead to significant inflows into Chinese equities from foreign investors. However, as portfolio manager of the emerging markets equity fund SKAGEN Kon-Tiki Fredrik Bjelland explains, while the absolute numbers expected in terms of A-shares inflow may seem high – some estimate USD 40 billion – they are relatively modest compared with the size of the A-share market at USD 8 trillion. He therefore does not expect any major short-term impact on the market.

“That being said, we believe that this is a significant directional change and that the share of China’s weight in emerging market and global indices will only rise with time. As such, global investors can ill afford to ignore this market going forward,” comments Fredrik.

Benchmark agnostic

For SKAGEN Kon-Tiki, the index inclusions do not change anything per se. The team is benchmark agnostic and has already made a few A-share investments well ahead of index inclusion. Two recent examples include Gree Electric, the world’s leading air conditioning supplier, and Hangzhou Robam Appliances, a high-end kitchen appliance manufacturer. While the team has already taken profit in Gree Electric and exited the stock, the recent correction in Hangzhou Robam Appliances provided an opportunity to enter the stock at an attractive valuation.

Important to be active

The Kon-Tiki team sees significant opportunities for finding attractively positioned companies in A-shares and considers the market structure to be conducive to active management. Due to the heterogeneous nature of emerging markets, the team believes that active managers have greater opportunities to add value through a disciplined and selective investment process.

However, the team remains wary of higher risks in China, especially with respect to financial disclosure, Environmental, Social and Governance (ESG) factors and generally higher valuations than for similar companies in Hong Kong. ESG factors are important to safeguard long-term value creation and it is therefore important to be able to carry out independent analysis across financial and non-financial metrics, something that active managers are well placed to do.

“We will therefore continue to approach China in the same way that we approach any opportunity, namely focused on companies (bottom-up) with a clear view on risk/reward trade-off,” comments Fredrik.

From Shanghai to Stavanger

For Fredrik, who left Shanghai for Stavanger to join the Kon-Tiki team just nine months ago, working at SKAGEN in Stavanger has inevitably been a big change from working at NBIM in London and Shanghai. Nonetheless, he has been impressed by the strong culture and team dynamic at SKAGEN and singular focus on uncovering attractive investment opportunities for the fund’s unit holders.

“We have introduced a number of new companies into the portfolio while at the same time maintaining the clear value-based investment philosophy that attracted me to SKAGEN. I have also enjoyed engaging with many of our clients. Gaining a better understanding of our different clients’ expectations and how we can best meet them has been an important focus for me as I have settled into the team,” comments Fredrik.

At the time of writing, Fredrik is set to embark on a nine-day trip to China to visit a wide range of companies and former contacts in Shanghai, Hangzhou, Suzhou and Wuxi – all cities within a two hour train ride of Shanghai – and a cluster of high-tech industries.

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