Our Chairman’s Message
Value Partners faced a difficult 2021, with Chinese stocks falling the most since the global financial crisis of 2008. But we remained profitable, with HK$457.8 million in net profit for 2021 (basic earnings per share of 24.7 HK cents), which compares with 2020’s HK$1.379 billion. And we remain a cash-rich, dividend-paying company, with a dividend of 8 HK cents proposed for 2021.
Reflecting the difficult market, our flagship Value Partners Classic Fund1 (size: US$1.52 billion) declined 6.6% in 2021, after having recorded net gains of 38% and 32%, respectively, in 2020 and in 2019. Note, however, that the fund remains an out-performer; for comparison, the benchmark Hang Seng and MSCI China indices were down 12.3% and 21.7%, respectively, in 2021, while in 2020 and 2019, the two indices recorded gains of 0.2%/29.5%, and 13.6%/23.5%, respectively.
(Since inception in 1993, Value Partners Classic Fund1 has returned a net 4,723%, compared to the Hang Seng Index’s return of 548% over the same period; in 28 years of existence, the fund recorded a profit in 20 of the years and a loss in eight of the years (the fund’s returns are expressed in terms
of its US$ “A” units)).
While a majority of Value Partners’ products are invested in equities, we also have some funds dedicated to fixed income, particularly high-yield U.S. dollar offshore bonds issued by Chinese property developers. These were very profitable for many years, but last year the bonds plunged following a regulatory crackdown on the property sector. The entire Chinese high-yield bond market suffered badly, including our Greater China High Yield Income Fund, which saw major redemptions.
This helps to explain a drop in our assets under management to US$10 billion at the end of 2021, from US$14.2 billion a year earlier. Fortunately, by year end, the high-yield market had regained a degree of stability, with the government relaxing some of its rules, but it may take time for investor
confidence to recover.
Overall vision
With hindsight, it is not surprising that the Beijing government chose 2021 to tighten regulations. China was in a sweet spot, with the pandemic under control, and enjoying an export boom as the “factory of the world.” In 2021, growth at 8.1% meant that the Chinese economy grew by an amount equal to the entire gross domestic product of a major country like Italy or Canada. What better time to push forward with reforms, even at the expense of a setback in stock and bond markets?
As is now well known, in pursuit of its “Common Prosperity” plan, Beijing cracked down on property, internet e-commerce platforms and after-school tutoring, sending a chill through financial markets. We think it’s a case of short-term pain for long-term gain. Beijing has an overall vision for Chinese society to be fairer, with more sustainable growth, and an opportunity came along in 2021 to escalate efforts against monopolistic practices and a blind pursuit of profits in the business sector.
For 2022, the good news for investors is that “peak regulation” is over and done with, with Beijing now putting its emphasis on stability, with a target to grow the economy by 5.5% or more this year. Compared with some other areas of the world, China is well-positioned. The government and central bank maintained strict financial and social discipline throughout the pandemic, leaving China with significant room to relax policies to maintain a dynamic economy. By contrast, many other parts of the world are in a different cycle, facing social instability, rising inflation and a necessity for higher interest rates, while confronted with financial bubbles formed as a result of excessive money-printing.
We believe an increasing number of global investors are looking to diversify risk by putting more money into China-related stocks and bonds. At the same time, within China, investment in stocks and other capital market products is being encouraged. The property sector, where bubbles formed
in recent years as a result of over-investment, remains out of favour. President Xi Jinping personally announced the launch of a third stock exchange, in Beijing, in 2021, signalling high-level support for markets.
Large-scale military conflict in the Ukraine, which broke out at the time of writing in February 2022, could strengthen China’s status as a safe haven for investors (as indicated by the strength of the renminbi).
With only about 10% of Chinese savings currently invested in equities, there is plenty of room for growth and a new trend of buying stocks through mutual funds. Thus, for the world’s asset management industry, China is a particularly bright spot.
As a leader and pioneer in China investing, Value Partners is well positioned, with its own office in Shanghai established 12 years ago. Currently, we have 44 staff stationed on the Chinese mainland, out of 236 people employed by the Group. We are aware that Beijing likes the kind of investing that
we do, as it seeks to encourage an institutional culture and investing based on fundamental research, pushing the market to become more efficient and rational.
Sincerely,
CHEAH Cheng Hye
Co-Chairman and Co-Chief Investment Officer
- The fund (A Units) was launched on 1 April 1993. Calendar returns of the fund (A Units) over the past five years: 2017: +44.9%; 2018: -23.1%; 2019: +32.4%; 2020: +37.6%; 2021: -6.6%. The Manager does not accept any application for A Units until further notice. New investors and existing unitholders who wish to top up may subscribe in C Units. Investors should note that figures for A Units may differ from C Units, due to differences in launch date of these classes. The fund (C Units) was launched on 15 October 2009. Calendar returns of the fund (C Units) over the past five years: 2017: +43.3%; 2018: -23.5%; 2019: +31.9%; 2020: +36.8%; 2021: -7.2%. Source: HSBC Institutional Trust Services (Asia) Limited and Bloomberg. Fund performance refers to A Units unless stated otherwise, in USD, NAV to NAV, with dividend reinvested and net of fees. Indices are for references only.
