- Despite continued volatility, Chinese equity funds have averaged growth of 29% since hitting its lowest point in January 2024.
- Out of 63 China funds analysed, only 7 outperformed their sector peers and achieved a top 4 or 5-star rating, while 40 funds have a history of poor performance and received a poor 1 or 2-star rating.
- The FSSA Greater China Growth B Acc fund has emerged as one of the top performers over the past 5 years, with a return of 17.38% in the IA China/Greater China sector.
- With the sector experiencing its longest period of positive returns since 2020, many analysts believe the region could be on the cusp of a bull market.
After a challenging period of regulatory crackdowns, pandemic disruptions, and trade tensions, China’s equity market appears to be regaining momentum. For UK investors, this raises an important question: are Chinese equity funds on the brink of a bull market?
The signs are increasingly positive. Despite continued volatility the IA China / Greater China sector has averaged growth of 28.77% between 22nd January and 24th October 2024 - which was the highest of any sector during the period.
In this report we assess why recent government legislation has increased the likelihood of a bull market for Chinese equity funds and we also identify 5 funds within the IA China / Greater China sector that have consistently been among the top performers within the sector.
Is a Comeback Looming for Chinese Equities?
Chinese equity funds have had a horrible few years which has left the sector out of favour with many investors. The sector peaked in 16th February 2021, at which point it experienced a sustained period of underperformance with valuations tumbling by -54.23% to 22nd January 2024.
As shown in the above chart, Chinese equities had an extremely difficult period compared to other major equity markets. However, since 22nd January 2024 the region has averaged the highest growth of any other sector at 28.77%.
Why Chinese Equities Had Struggled
From February 2021 to January 2024, Chinese equities faced a sharp -54.23% decline, driven by a mix of regulatory changes, economic slowdown, and external pressures that shook investor confidence. The downturn began with the Chinese government’s sweeping regulations on the technology sector, aimed at tackling issues like data security and monopolistic practices. These unexpected restrictions hampered growth for major tech firms such as Alibaba and Tencent, which heavily weigh on Chinese equity indices, sparking a market-wide sell-off.
The real estate sector further compounded these issues. In a bid to control debt levels, the government imposed limits on property developers’ borrowing capacity. This policy led to financial struggles for major developers, like Evergrande, and rippled through related industries, adding to the economy’s downturn. Additionally, China’s strict zero-COVID policy introduced frequent lockdowns, which constrained consumer spending, disrupted supply chains, and stifled economic activity.
External factors added to these pressures, with rising global interest rates making Chinese assets less attractive and geopolitical tensions—especially with the U.S.—raising concerns over China’s long-term growth potential. Together, these factors created a cycle of investor uncertainty and capital outflows, culminating in the significant downturn of Chinese equities. However, with recent policy adjustments and stabilising economic indicators, Chinese equities may now be positioned for potential recovery.
Why Analysts Are Optimistic About Recovery of IA China Sector
Analysts and financial companies are increasingly viewing Chinese equities as having strong growth opportunities.
Goldman Sachs, recently raised its outlook on Chinese stocks, citing strong government stimulus measures and the easing of 4 years of COVID restrictions as drivers of economic recovery and corporate earnings growth. Goldman’s analysis suggests that key sectors like technology and consumer goods are positioned for a rebound as consumer demand improves and regulatory pressures ease. According to their projections, China’s GDP is set to grow by 5% in the coming year, a notable acceleration that could positively impact equity markets.
Morgan Stanley also sees Chinese equities as attractively valued, especially given recent market declines. Morgan Stanley's analysts see opportunities particularly in sectors like healthcare and technology, where domestic innovation and rising consumer demand are expected to fuel growth.
In addition, BlackRock, the world’s largest asset manager, recently re-affirmed its favourable outlook on Chinese equities, specifically noting the government’s focus on technological advancement and renewable energy as long-term growth drivers. BlackRock analysts see China's leadership in artificial intelligence, e-commerce, and green technology as critical advantages in the coming years, predicting that the country’s increased focus on self-reliance and innovation will help local companies capture greater market share domestically and abroad.
IA China/Greater China Sector Fund Performance Summary
We analysed 63 China funds within the IA China/Greater China sector to assess their performance and sector ranking over the past 1, 3 & 5 year periods.
Our findings reveal that only 7 funds achieved top-tier ratings of 4 or 5 stars. These top-performing funds consistently exhibited resilience delivering superior results compared to most of their sector peers across multiple timeframes.
Conversely, a significant proportion of the funds underperformed, with 63.5% receiving a poor 1 or 2-star performance rating. 19 funds were assigned a 1-star rating, while 21 funds received 2 stars, indicating subpar performance relative to their sector peers.
This disparity in performance highlights the critical importance of selecting the right funds to achieve sustainable long-term investment success in the Chinese market.
5 Best Performing Chinese Equity Funds
As market volatility continues and concerns around Chinese equities persist, fund selection is more critical than ever. Below we feature 5 of the best performing China funds and provide a detailed overview of their performance over the most recent 1, 3, and 5-year periods.
These funds have consistently been among the top performers within the IA China/Greater China sector, which has earned them each a top 4 or 5 star rating. Their impressive track records shows their ability to deliver strong returns in both the short and long term, making them well-positioned to capitalise on potential recovery in Chinese equities.
Fidelity China Focus
The Fidelity China Focus Y fund aims to achieve capital growth over time by investing in Chinese and Greater China equities. The funds' management team focuses on selecting stocks with strong fundamentals and competitive advantages. With £1.98 billion of assets under management, it has consistently ranked among the top performers in its sector.
The fund has demonstrated strong performance over the past 1, 3 & 5 years. Over the past year, the fund posted growth of 2.60%, significantly above the 12 month sector average of -1.51%. Over three years, it delivered an impressive 8.39% growth, ranking 1st in the sector despite the sector average being a negative -27.27%. Over 5 years the fund returned growth of 6.58% compared to the sector’s average -9.71%. This steady outperformance shows the fund's ability to deliver returns even during difficult market conditions.
A key driver of this success is the fund’s focus on sectors such as consumer discretionary, financial services, and technology. Major investments in companies such as Alibaba and Tencent have benefited from China’s shift towards tech-driven growth.
Fidelity Greater China
Launched in 1990, the Fidelity Greater China Y Acc fund currently manages £568.91 million in assets. The fund is designed to provide long-term capital growth by investing in companies across China and the Greater China region, including Hong Kong and Taiwan.
The fund employs a bottom-up approach to stock selection, focusing on companies with strong fundamentals and high growth potential. Its top holdings include key players like Taiwan Semiconductor Manufacturing Co., Tencent, and Alibaba, which are well-positioned to benefit from rapid technological and consumer-driven changes in the region.
In the last year, the fund achieved growth of 7.86%, outperforming the sector average of -1.51%. Despite facing challenges over a three-year period, where it experienced a decline of -20.22%, the fund still performed better than the sector average of -27.27%. Over five years, the fund posted a return of 4.58%, which when compared to the sector average was very impressive. This performance places it among the top-performing funds in its category.
The fund’s strategy centres on long-term growth, particularly in dynamic sectors such as technology, which forms a large part of its portfolio. Additionally, Its active management approach aims to maximise returns while mitigating risks by diversifying across multiple industries and geographic areas.
FSSA Greater China Growth
The FSSA Greater China Growth B Acc fund is one of the best-performing China funds and currently, it manages £443.10 million of investors’ assets. Its primary objective is to achieve capital growth over the medium to long term, typically over 3 years.
The fund invests at least 70% of its assets in shares of companies that are either based in or conduct the majority of their business in China, Hong Kong, and Taiwan. These companies can be listed on stock exchanges globally.
This 5-star rated fund has delivered strong performance, consistently ranking among the top 25% of its sector. Over the past year, it achieved a return of 6.63%, significantly outperforming the sector average of -1.51%. Despite challenges, its three-year return of -12.93% was notably better than the sector average of -27.27%. In the longer term, over five years, the fund posted an impressive growth of 17.38%, far exceeding the sector average of -9.71%, placing it among the top funds in the IA China/Greater China sector.
In addition to its core equity investments, the fund may allocate up to 10% of its portfolio to other funds, enhancing diversification. It also uses derivatives to manage risks and improve portfolio efficiency, allowing the fund to adjust to market volatility while capturing growth in high-potential sectors.
JPM Greater China
The JPM Greater China C Acc fund, launched in 2001, is designed to achieve long-term capital growth by primarily investing in companies located in the People's Republic of China, Hong Kong, and Taiwan. The fund currently manages approximately £1.21 billion in assets.
In the past year, the fund delivered a 6.59% return, significantly beating the sector average of -1.51%. While its three-year performance saw a decline of -24.29%, this still surpassed the sector average of -27.27%. The fund's five-year performance stands out with an impressive 15.37% growth, placing it 2nd out of 46 funds in its category.
The fund's consistent performance is due to its investment strategy, which focuses on large-cap growth companies, particularly in high-growth sectors such as technology, consumer cyclical, and financial services.
Schroder ISF Greater China
The Schroder ISF Greater China A fund is a £1.91 billion fund focused on delivering capital growth over 3 to 5 years. Its core strategy is to allocate at least two-thirds of its assets to equity and equity-related securities of companies based in, or with significant engagement in, China, Hong Kong SAR, and Taiwan. The fund is actively managed, aiming to outperform the MSCI Golden Dragon (Net TR) index.
The fund has consistently ranked among the top performers within the IA China/Greater China sector. Over the past 1, 3, and 5 years, it has delivered returns of 3.72%, -19.04%, and 10.16%, respectively, outperforming sector averages of -1.51%, -27.27%, and -9.71% over the same periods. These results highlight the fund's resilience in challenging market conditions.
A crucial factor behind the Schroder ISF Greater China A fund’s success is its flexible strategy, which allows the use of derivatives to manage risk and enhance portfolio efficiency. This approach has been particularly beneficial during periods of market volatility, further supporting the fund’s strong performance.
Strong Growth on The Horizon For Chinese Equity Funds?
The future outlook for Chinese equities remains cautiously optimistic despite the recent years of significant declines. After multiple years of underperformance driven by domestic challenges there are signals that the worst may be behind, and recovery could be on the horizon.
Several factors support this view. First, valuations for Chinese equities are currently trading at historically low levels, reflecting widespread pessimism. This presents a potentially attractive entry point for long-term investors.
There are also structural opportunities in industrials and technology sectors, as China advances its self-sufficiency efforts in key areas such as renewable energy and high-tech manufacturing. Furthermore, state-owned enterprises are undergoing reforms that could boost profitability and cash flow, providing compelling investment opportunities.
While geopolitical risks and external macroeconomic pressures (e.g., US interest rate hikes and supply chain diversification) remain, many analysts believe that the cyclical downturn China is experiencing is not unique and that this market could follow a similar recovery trajectory to previous cycles, such as the post-2015 rebound.
Despite the volatility, certain China funds have managed to outperform their peers as discussed above. For investors considering exposure to Chinese equities, careful selection of funds with strong track records is essential. This approach will help you seek sustainable growth opportunities without expecting an immediate turnaround.
Strategic and Diversified Investing for Long-Term Success
Like many things in life, investing can be challenging. But those who adhere to a defined, long-term strategy and have a disciplined, realistic attitude to investing are usually the ones that accomplish their goals efficiently. When this is followed, better results can be obtained.
Investors can strengthen their investments and achieve better results by being aware of the costly mistakes described in this article and taking appropriate steps to avoid them.
Having a strategic investment approach and maintaining a diversified portfolio are key aspects of managing risk and achieving success, in long-term investments.
Remember, no single sector consistently leads in performance, so diversifying across various asset classes and regions can help stabilise and grow your investments over time.
Identifying the best performing funds within each asset class will also contribute to achieving optimal returns and safeguarding your financial future.
Download our full analysis to explore the complete performance data, sector rankings, and ratings of all 196 emerging market funds to determine which funds are most likely to provide strong returns in the future.
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