China Stigma Masks Top Stock Picker’s 24% Annual Returns
James Oberweis runs the best-performing Chinese stock fund in America. Investors, it seems, aren’t interested.
Oberweis’s benchmark fund ranks No. 1 in its peer group, delivering 24 percent annually over the past five years. The problem is the country. Having China in a fund’s name repels investors much the same way it attracted money over much of the past decade.
Global investors pulled $2.8 billion from funds focused on Chinese stocks this year after taking out $5.9 billion in 2013, according to EPFR Global, a Cambridge, Massachusetts-based data provider. Assets in Oberweis’s China Opportunities Fund (OBCHX) dropped by half since 2010 because of withdrawals, underscoring concern that growth in the world’s second-largest economy is slowing and a credit boom may be giving way to a bust.
“Is it frustrating?” Oberweis, president of Oberweis Asset Management Inc., which oversees $1.4 billion in Lisle, Illinois, said in a March 26 telephone interview. “Sure, absolutely it is.”
“A few years ago, people would buy anything that has the word China in it. The pendulum once again has swung the other way.”
The Bloomberg index of the biggest Chinese stocks in New York fell 0.8 percent yesterday, extending this year’s slump to 7.9 percent. The Shanghai Composite Index (SHCOMP) is down 2.7 percent this year and has lost 32 percent since April 2011. The S&P 500 Index is little changed in 2014 after reaching a record on April 2.
The 178 percent return in the Oberweis China fund tops that of all 22 U.S.-based funds investing in the Asian country’s stocks with at least five years of history, according to data compiled by Bloomberg.
Oberweis, who took over the asset management firm from his father in 2001, has skirted much of the rout in Chinese equities by picking stocks that would largely be unaffected by the economic slowdown. The China fund, which now has $207 million, invests in small-capitalization companies, or stocks with a market value of $2 billion or less.
Among stocks that have fueled the fund’s 45 percent gain over the past year are online retailer Vipshop Holdings Ltd., software developers Qihoo 360 Technology Co. (QIHU) and Kingsoft Corp. and casino operator Galaxy Entertainment Group Ltd., according to data compiled by Bloomberg.
Investors are too fixated on the economy while ignoring the growth potential of individual companies, Oberweis said. China’s economy probably grew 7.4 percent last quarter from a year earlier, on track for the slowest annual expansion since 1990, according to analysts surveyed by Bloomberg News in March.
“The frustrating part to me more than anything is institutions are not recognizing the size and opportunities of the China market,” said Oberweis, 40. “If sentiment in China was better right now, we’d be seeing massive inflows.”
China looked unbeatable in 2007 when its economy grew 14 percent and overtook Germany to become the world’s third largest economy. About $6 billion poured to Chinese stock funds between 2006 and 2008 when the global financial crisis started, according to EPFR.
Investors have soured on China. Shanghai Chaori Solar Energy Science & Technology Co. missed an interest-rate payment in March, the first default by an onshore Chinese company after a five-year credit binge. The number of listed non-financial Chinese companies with debt double equity has surged 57 percent since 2007 to 256, Bloomberg data show.
The government outlined a package of stimulus last week from railway construction to tax relief on concern it won’t reach its 7.5 percent growth target. While the nation can’t ignore the “difficulties and risks” from increasing downward pressure on the economy, it is confident it will keep growth in a reasonable range, Premier Li Keqiang said in a statement on March 28.
“The chaos is just beginning,” Hao Hong, chief China equity strategist at Bocom International Holdings Co., told Rishaad Salamat on Bloomberg Television’s “On the Move” on April 2. In this environment, “stocks tend to perform very badly in China,” he said.
Some of Oberweis’s bigger competitors fared no better. Fidelity China Region Fund (FHKCX), the largest of its kind, lost $1 billion of its assets since the peak of $2.4 billion in 2009. Assets of Matthews China Fund have shrunk to $1.2 billion from $3 billion in December 2010, according to data compiled by Bloomberg.
Richard Gao, who manages the Matthews China Fund (MCHFX), didn’t immediately respond to calls seeking comment. Charles Keller, a spokesman at Fidelity, declined to comment in an e-mail.
While the broad MSCI China index fell, investors who pulled out of the equity market missed out on opportunities in the smaller companies that Oberweis invests in.
The MSCI’s gauge for small-market capitalization Chinese companies gained 19 percent over the past year as rising incomes fueled demand for e-commerce and health care and as the government’s war against pollution bolstered environment protection companies. China’s disposable income per capita has increased 77 percent to $4,454 million over the five years through 2013, the government data show.
American depositary receipts of Vipshop, an online fashion retailer based in Guangzhou, have jumped 53 percent this year. Chinese demand for marked-down Anne Klein raincoats and Nike T-shirts helped Vipshop’s revenue surge 117 percent in the fourth quarter, beating analysts’ forecast.
Oberweis’ top holdings include raw-milk producer China Modern Dairy Holdings Ltd. (1117), a business he can relate to. His family owns a dairy business in Aurora, Illinois, where he delivered milk and cakes and waiting tables at ice cream stores when growing up. He joined Oberweis Asset Management in 1995, six years after his father, now an Illinois state senator, founded it.
Oberweis’s China fund assets topped $1.2 billion in 2007 before plunging to a low of $108 million in 2012. The money that has trickled back in since have been “modest,” according to Oberweis -- $21 million in 2013 and $12 million this year. While frustrated, he hasn’t lost his confidence that investors will eventually return.
“There’s definitely opportunity for growth,” said Oberweis. “If you look back, when pessimism is really strong in China, it’s a great time to be buying.”
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