Q&A: BlackRock’s Jing Ning

The portfolio manager of the BlackRock China Fund discusses investment opportunities in China and the importance of valuation discipline.

How would you describe your fund?
It is a value-orientated China investment fund with $1.38 billion of assets under management. It is benchmarked against the MSCI China 10/40 index and predominantly invests in stocks of companies that are either domiciled in China or conducting the majority of their business there. They are listed primarily on the Hong Kong stock exchange but the fund can also invest in Chinese companies listed in Shanghai, Shenzhen, the US or elsewhere.

What’s the benefit of investing in China-focused funds?
Investors benefit from the specialisation that comes with dedicated country funds, but also get broad exposure to the companies that make up the Chinese market. China is projected to become the largest economy in the world over the next few years. A diversified exposure to several sectors of the economy can have benefits over a limited exposure, which investors would get via a regional fund.

With so many China-focused funds out there, how do you differentiate?
We have a bottom-up approach and focus on intrinsic value when selecting stocks, rather than themes. The fund has outperformed the benchmark since 2009 and is one of the top performers of its peer group.

The bottom-up approach essentially means that we’re meeting the companies, talking to the management and evaluating their financial reporting. The starting point is to investigate cheaper stocks in the market and valuation discipline is central to the process. A great company, if expensive, need not be a great investment. A value approach, combined with a longer-term investment horizon, allows us to identify stocks that are undervalued but should be beneficiaries of the structural growth dynamic that is driving the world’s second-largest economy.

Which sectors will likely generate good returns in the coming years, and which will not?
There are some good stocks among non-cyclical industrials and healthcare. The healthcare sector has long-term demand due to the ageing population and the overall valuation for the sector is relatively cheaper than some of the more cyclical choices in the Chinese market at the moment.

Among the non-bank financials, which we also favour, wealth management companies can deliver good returns, particularly compared to insurers.

China’s economy is likely to go through structural change over the next few years as it moves away from a focus on investment-led growth. In part, we invest in companies that we believe will be beneficiaries of this structural change.

What kind of healthcare stocks do you like?
We are investing in pharmaceutical distribution, equipment and medical research companies. These companies are poised to benefit not only from the long-term health trends within China, but also from growth in global health trends. We believe these companies are attractively valued and have business models that support longer-term revenue and earnings growth.

The introduction of the BlackRock China Fund on your website shows a heavy weighting towards financials and energy. Why do you like these sectors?
The MSCI China 10/40 index is dominated by financial and telecommunication companies, which explains the fund’s large weighting towards financials. However, some of the best investment opportunities can be in other sectors and in companies that are not part of the main benchmark, often mid-cap companies. We also invest in these types of companies.

Urbanisation is viewed as a big theme. Does the fund have any exposure to that?
Yes, urbanisation will continue, but the focus will likely shift from “hard” to “soft” urbanisation aspects and the quality of life within these cities. This can have an impact on companies related to transport, communications and healthcare, for example.

What changes have you made to your portfolio recently, and why?
Earlier this year we sold some property and bank names and bought some non-cyclical industrial stocks. We reduced our holdings in banks as we felt that valuations had gotten too high and there was limited further upside. We also reduced our property holdings given the on-going desire by the Chinese authorities to limit further property price increases. This is likely to impair the earnings growth of property developers for the time being.

Investment-led growth will still be a significant driver of economic growth in China for the foreseeable future, so we continue to invest in companies which we believe will be beneficiaries of this growth. These can be in the industrial sector.

China’s equity markets have performed poorly during the past two years. What’s your outlook this year?
This year is likely to be as volatile as last year, but we are at an early stage. It is hard to make a judgment on current trends until we get the March data, as the NPC [National People’s Congress] and Chinese New Year can obscure the true picture. The March data will be more meaningful for analysing the underlying state of the economy. However, any kind of recovery this year will not be that large as the economy is still undergoing a de-stocking process. End demand is not strong across all sectors, so returns are likely to be stock-specific rather than broad-based. Corporate earnings are likely to improve but not across all sectors and they too will be stock-specific.

Do you have plans to launch new funds in the near future?
We see increasing demand from investors for China access products and always look to offer our clients the best investment opportunities in each market.

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