|Minyanville.com, Spring, 2013. This article was written with Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with minyanville.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
KraneShares is now offering a suite of US-listed ETFs. Plus, a look at why China Merchants Bank has a distinct advantage over its competitors.
Investors have long sought to take advantage of the growth in China.
Many believe the spate of China-focused exchange traded funds serve them well. Perhaps they represent a lot of progress since Richard Nixon’s 1972 visit and famous handshake with Mao Zedong, but in reality, the current brand of ETFs do not serve investors particularly well.
In particular, purchases of shares in Chinese companies for bundling in ETFs purchased by foreigners are constrained to “H” shares, so named because they are a separate class of stock trading not on the Shanghai Stock Exchange nor the Shenzhen Stock Exchange, but on the Hong Kong Stock Exchange or SEHK. The bifurcation of investors into separate classes – following suit with human history’s miserable track record regarding class systems – undermines investor interests by exposing them to subordinate dividend rights, excessive currency fluctuations, and in some notable instances, inferior stock performance.
But the worm has turned with a recent filing from KraneShares, to offer a suite of US-listed ETFs that provide investors access to so-called “A” shares listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange. How this came to pass, surprisingly, is related to a trip I took last week to the Ernst & Young World Entrepreneur of the Year (WEOY) Awards.
While there, I had the opportunity to meet with and discuss Chinese investments with Dr. Weihua Ma, CEO and President of China Merchants Bank (HKG:3968). China Merchants Bank is the only Chinese bank that is not state-owned, which gives it a distinct advantage over its competitors.
To wit: Under Dr. Ma’s leadership, CMB has grown from 30 employees in 1999 to over 50,000 employees, with 900 branches and assets approaching $500 billion (USD) as of the end of 2012.
What accounts for the bank’s success? Through a translator, Dr. Ma said, “China Merchants Bank has always had a Western mentality to doing business, and uses government resources in a limited manner and only when they can really be leveraged to help growth.” A bit inscrutable perhaps as a strategy, but nonetheless successful.
CMB’s scale in China allows for expansion into new markets. As US investors evaluate gaining exposure to growing companies like CMB, they have a variety of choices. ETFs are one way to gain exposure to the world’s second largest economy. While historically iShares FTSE China 25 Index Fund (NYSEARCA:FXI), SPDR S&P China (NYSEARCA:GXC) and iShares MSCI Hong Kong Index (NYSEARCH:EWH) have been popular choices, newcomer KraneShares offers an innovative approach by taking the Chinese government’s 12th Five Year Plan and investing in the companies within the focus industries. KraneShares hopes to launch next month.
Famed investor Jim Rogers suggested investors take a close look at the most recent five-year plan published in 2011 by the National People’s Congress. There are lots of goals, such as addressing income inequality, upgrading the social welfare system, and reducing energy consumption.
However, some of the smaller metrics are even more telling, such as a $449 billion investment to grow the high-speed rail network from its current 5,800 miles to 11,200 miles by 2015. By contrast, here in the US – and depending on your definition – there are no actual high-speed rail systems, but the US High Speed Rail Association has a plan to complete a 17,00- mile high speed rail system by 2030.
Counsels Rogers, “If I were you, I’d get out there and do some studying, because whatever the government decides it wants to do, it will probably make a lot of people rich in those sectors.”