Saturday, August 11, 2007

Morgan Stanley China A-Share Fund (CAF) suffered from its holdings in other China funds

On 15 March in my story “Comparison of two China A-share ETFs” I queried the CAF manager why he has invested 5% of investors’ money into other China funds:

“..I really cannot understand the reason for doing so when there are a whole lot of available alternative companies in the Chinese market. So practically 5% of CAF is a Fund of Funds. This raised a question whether the CAF manager has really tried his best effort to increase the return, may be a sign of agency problem. Though 5% of the NAV is not a significant amount, I always believe minor issue can help us uncover bigger truth…”

Today I have analysed CAF’s portfolio performance using its published March holdings, I noticed that out of the 11 funds the CAF manager invested in, he exited 5 of them while 1 new “Great Wall Jiufu Core Value Equity Fund” was added.

Based on its March report the 7 funds it holds incurred a loss of 74% (US$16M) which is around 3.7% of total CAF NAV. Full analysis of its individual position return is here.

So my original query is still valid. I still challenge the CAF manager why investment in other China funds is a better option than picking stocks by himself when there are over 1500 A-share stocks he can choose from in Shanghai and Shenzhen.

Worst still he has exited the best performing fund out of the original 11 he picked, which is the iShare A-50 Tracker Fund (2823.HK).

6-month relative performance of CAF vs. iShare A-50 Tracker Fund (2823.HK):

Disclousre: I have no position in the above ETFs