The rise of fundamental factors in China A shares
Blog post
June 6, 2019
- Our research suggests fundamental factors gained traction in China-A-share strategies.
- For factors such as value and quality, risk-adjusted returns for China A shares and global equities converged over the last two years.
- Institutional investors' increased presence likely helped to tip the scales away from local, sentiment-driven retail investors.
Value and quality performance strengthened
Value and quality are well-known fundamental factor strategies widely used by institutional investors in portfolio design. Last year, we found that these, and other factors, had weaker long-run return premia in China A shares, compared with emerging and developed markets.
One year later, we found that the book-to-price (a value factor) and earnings quality (a quality factor) were among the top-performing style factors in China A shares for full-year 2018 and in the year to date, despite the transition from a bear to a bull market.
Factor information ratios: top-performing style factors in the China A Long-Term Model
2018 | Unnamed: 1 | Unnamed: 2 | 2019 year to date | Unnamed: 4 |
|---|---|---|---|---|
2018 Dividend Yield | Unnamed: 1 2.4 | Unnamed: 2 None | 2019 year to date Momentum | Unnamed: 4 1.33 |
2018 Investment Quality | Unnamed: 1 2.27 | Unnamed: 2 None | 2019 year to date Earnings Variability | Unnamed: 4 1.18 |
2018 Book-to-Price | Unnamed: 1 1.59 | Unnamed: 2 None | 2019 year to date Beta | Unnamed: 4 0.91 |
2018 Profitability | Unnamed: 1 1.41 | Unnamed: 2 None | 2019 year to date Book-to-Price | Unnamed: 4 0.77 |
2018 Earnings Quality | Unnamed: 1 1.4 | Unnamed: 2 None | 2019 year to date Earnings Quality | Unnamed: 4 0.45 |
2018 Long-Term Reversal | Unnamed: 1 1.27 | Unnamed: 2 None | 2019 year to date Investment Quality | Unnamed: 4 0.11 |
2018 Beta | Unnamed: 1 1.24 | Unnamed: 2 None | 2019 year to date Long-Term Reversal | Unnamed: 4 0.03 |
2018 Momentum | Unnamed: 1 0.57 | Unnamed: 2 None | 2019 year to date Liquidity | Unnamed: 4 0.02 |
2018 Leverage | Unnamed: 1 0.53 | Unnamed: 2 None | 2019 year to date Dividend Yield | Unnamed: 4 0.01 |
2018 Size | Unnamed: 1 0.05 | Unnamed: 2 None | 2019 year to date Growth | Unnamed: 4 -0.1 |
Data as of June 4, 2019.
Further, we observed convergence between China A shares and global market returns for book-to-price and earnings quality.
China A shares' risk-adjusted factor returns converged with global results
Data from January 2009 to March 2019. The graphs illustrate risk-adjusted returns of the book-to-price ratio, earnings quality and profitability, respectively, in the China model and the MSCI Global Total Market Equity Model for Long Term Investors (GEMLT).
Structural trends helped drive change
Local institutional investors in China A shares are aware of these strategies: Bloomberg recently reported how some funds generated strong outperformance by pursuing value strategies. As institutional investors establish a stronger foothold in this market, we might expect a wider adoption of fundamental factor strategies.3
Additionally, the convergence of value and quality returns between China A shares and global markets may be related to the growing participation in the A-shares market by international investors who follow these strategies. Galaxy Securities, citing data from the People's Bank of China, recently reported that foreign investors now hold CNY 1,684 billion of China A shares, while local mutual funds hold CNY 1,946 billion. The numbers were CNY 344.8 billion and CNY 1,315 billion, respectively, in December 2013.4
Despite retail investors' enduring influence, fundamental factors were increasingly important return drivers in China A shares. Recent return patterns suggest that gradual institutionalization and internationalization of the A-share market may further increase the importance of systematic, factor-based investment strategies.
Further Reading
1S.R. and C.C.W. “A crazy casino.” The Economist, May 26, 2015.2Lockett, H. “Chinese stock rebound has fingerprints of retail investors.” Financial Times, March 14, 2019.3Wang, A., Lu, M., Pei, S., Wang, C. and Chang, R. “Top Fund Proves Value Investing Works in China with 159% Return.” Bloomberg News, Dec. 24, 2018.4“Foreign-invested A shares of 1,668.88 billion yuan directly to the public funds of 1,945.796 billion.” Galaxy Securities Fund Research Center, March 2019.
The content of this page is for informational purposes only and is intended for institutional professionals with the analytical resources and tools necessary to interpret any performance information. Nothing herein is intended to recommend any product, tool or service. For all references to laws, rules or regulations, please note that the information is provided “as is” and does not constitute legal advice or any binding interpretation. Any approach to comply with regulatory or policy initiatives should be discussed with your own legal counsel and/or the relevant competent authority, as needed.