Asia’s Top-Performing Hedge Fund Bullish About China Insurers

Asia’s top-performing hedge fund is holding on to yuan shares of Chinese insurance and utilities companies, even after the Shanghai Composite Index surged 53 percent in 2014.

Monetary easing in China will help bolster investment-linked insurance sales and make the dividend yields of utility companies more attractive compared with lower-yielding bank deposits and bonds, Joseph Zeng, a partner and Hong Kong office head of Greenwoods Asset Management, said in an interview.

Greenwoods’ $1.4 billion Golden China Fund returned 30 percent last year, the second highest of 27 hedge funds globally with at least $1 billion of assets which have reported December numbers, and the highest return for an Asia-focused fund in that category, according to data compiled by Bloomberg. The majority of its return in 2014 was from yuan-denominated class-A shares listed in China, Zeng said.

Chinese policymakers expanded stimulus as the country headed toward the slowest full-year growth in almost a quarter century, cutting interest rates for the first time in more than two years in November. Easing monetary policies helped drive the Shanghai composite from the worst-performing major stock gauge tracked by Bloomberg in the first five-and-a-half months of 2014 to the best by year-end, raising questions about whether there are still bargains to be found.

In June, “people were pessimistic about A-shares and we told them A-shares presented a rare investment opportunity,” said George Jiang, Greenwoods’ chief executive officer, in teleconference from Shanghai. “We would say to them now that we will continue to hold some A-shares while looking for investment opportunities in Hong Kong-listed stocks and American depository receipts.”

Lower Rates

China’s central bank unexpectedly pumped money into the banking system using reverse-repurchase agreements for the first time in a year last week and repeated the act today, lowering money-market rates.

The Golden China Fund, Greenwoods’ oldest and largest China hedge fund, makes large investments in its top ideas, with its 10 biggest stock positions accounting for just over half of its assets, according to Zeng.

Its holdings of yuan shares surged to more than 40 percent of assets under management last year, from above 10 percent in late 2013, said Zeng. The fund bought yuan shares in large, high-quality life insurers, utilities, consumer and real estate companies; these companies include Ping An Insurance (Group) Co. and hydro power producer SDIC Power Holdings Co., Zeng said.

‘Slightly Undervalued’

Stronger stock markets will improve insurers’ investment returns, in addition to business growth as the government encourages increasing insurance ownership, said Zeng. SDIC’s share price has more than doubled since March last year.

The strongest full-year rally since 2009 lifted the Shanghai Composite Index’s price-to-earnings ratio to 16 times, from below 10 times in July, according to data compiled by Bloomberg. That compared with more than 18 times for the Standard & Poor’s 500 Index and nearly 23 times for the Stoxx Europe 600 Index.

Yuan shares have gone from “extremely undervalued” to “slightly undervalued,” said Zeng. The fund’s yuan-share holdings still stand at above 30 percent of its assets. In addition to scouting for opportunities among Hong Kong- and U.S.-listed stocks, the Golden China Fund is shifting some assets to medium-sized companies with growth prospects and lower valuations, Jiang said.

Discretionary consumption companies, such as gold, jewelry retailers, liquor, furniture and appliances makers, may outperform this year, said Zeng.

“They have been hit hard by the anti-corruption campaign and slower economic growth,” said Jiang. “We’re also looking for undervalued property companies with good governance or those that can take over other companies in this softening property markets.”

Greenwoods oversees about $4.6 billion in various funds and accounts focused on public equities at the end of last year, according to Zeng.