Measuring China’s impact on your portfolio

27 October 2015

The recent turbulence in global markets, caused by China’s economic realignment and the associated slowdown in growth, has highlighted how our discretionary portfolios benefit from active management of Chinese exposure.

 As part of our product and service offering, it is vital that we ensure your investing peace of mind, during both good times and times of uncertainty. Currently the impact of China on global markets and individual investment portfolios is very much on the radar of our portfolio management team. Our response and approach is being informed by the following considerations:

A focus on managing emerging market-related risks

Ashburton Investments’ portfolio management team offers an offshore discretionary service which capitalises on the best of Ashburton’s top-down multi asset views while allowing for individual client requirements at implementation. Our portfolio managers are an integral part of our global investment process, driving in-house views as members of Ashburton’s Multi Asset, Equity and Fixed Income Committees. The resulting agility which springs from this approach enables our portfolio managers to effectively adjust your portfolio in a timely manner as the global economic environment evolves.

Over the past few turbulent months this flexibility has increasingly included managing emerging market-related risks across Ashburton’s portfolio offering. Our investment team carefully assesses potential threats and opportunities caused by volatile markets and an increase in macro-related correlations.

Our investment team carefully assesses potential threats and opportunities caused by volatile markets and an increase in macro-related correlations.

The future favours a more selective approach

As our Head of Asset Allocation, Tristan Hanson, highlighted recently, the market’s perception of the growth trajectory in developing countries has changed over the past 12 months. This has highlighted the need for structural reform in emerging markets; and not only in China.

Ashburton Investments has increasingly reflected this outlook in its house view. We reduced equity exposure to China earlier in the year after the strong rally in the domestic A-share market. We also recently moved to an underweight position in Asia, after holding limited emerging market positions in equities over the past few years.

The team has long held the view that China’s growth rate will structurally decline over time. However, we believe Chinese policymakers have room to manoeuvre, which will ensure that an outright deflationary outcome for the domestic economy is likely to be avoided. At the same time, the decision by Chinese policymakers to use flexibility in its currency as an additional lever could have important implications for the longterm outlook for global growth, inflation and commodity prices, as well as the equilibrium of related currencies.

Overall, this leaves the team preferring Indian equities over other emerging markets at this juncture. Reforms to address supply chain and infrastructure issues seem to be on track, which are being further supported by India’s longheld status as commodity importer.




Source: Morningstar Direct

With the Ashburton Chindia Equity Fund performing broadly in line with the global equity indices year-to-date, while adding significantly higher returns over the last three years (above +55% relative to global equity markets at 39%), this route of implementation has limited drawdowns for our portfolios. The Fund has been helped by the strong structural story developing in India.

The positive impact of our active implementation of Asian equity exposure

While decisions to allocate to given regions are formed at the Multi Asset Committee level, the final pronouncement of how top-down exposure is best implemented for a specific Ashburton client sits with our portfolio managers. In the case of Chinese equity exposure, the portfolio team’s decision to use the clean share class of the Ashburton Chindia Equity Fund (managed by Craig Farley) as our implementation instrument has allowed for a continuously active allocation by the fund manager between India and China; depending on where the bottom-up opportunities were most compelling over time.


Source: Ashburton Investments

The above is but one example of how the specific implementation of our strategic view at the portfolio level can help improve return and risk outcomes over time. In addition, there are potential applications for exchange traded fund-based strategies to enhance diversification; and active third-party funds can also be used for specific expertise (in high-yield fixed income for example) where appropriate. In a cost-efficient way these strategies increase our flexibility at portfolio level, allowing us to accommodate our clients’ specific needs while ensuring they achieve their return objectives in the longer-term.