Mark Dampier: Earn from the great Chinese growth story

The Analyst

Over the last two weeks or so I have highlighted UK equity income funds, because I believe that blue chip companies with defensive characteristics and offering good dividends look cheap. However, this week I thought I might go to the opposite end of the spectrum and talk about a country which is always in the news and can now be ranked alongside the United States in its importance economically – China.

China is seen as purely a growth story but many of their companies do provide an income, indeed the MSCI China Index currently yields 1.84 per cent. So it was interesting to see Neptune launch their Greater China Income Fund last December. They are targeting a yield of 3.5 per cent which is not huge compared to what we can get on UK equity income funds, but it does provide investors with a fund that can invest in one of the great growth stories of the 21st century and also provide an income.

Neptune is one of the newer fund management companies. Under the stewardship of Robin Geffen the company has gone from strength to strength and it now manages around £5bn. 75 per cent of the company is owned by its staff and directors and it has already cemented a reputation for good performance across most of its funds. The business has not been modelled on a star manager concept either, it's genuinely a team effort and much of the talent has been developed in-house. This new fund is a prime example. It is managed by Douglas Turnbull who joined Neptune as an analyst in January 2007 and he is also the co-manager of the Neptune China Fund and the Neptune Asia Pacific Opportunities Fund. While his experience is relatively short, he is part of a team that includes many senior people so the blend of experience and new talent is an interesting one.

Neptune tends to look carefully at economic indicators to build a top-down global view. They then look to invest in industry dominant companies in their favourite sectors. This new fund will contain approximately 30 to 60 mainly larger companies, as the main dividend payers tend to be previously state-owned enterprises. Mr Turnbull will be looking carefully at companies with a good dividend history, which often indicates companies with financial strength.

Another reason to consider this fund is that you will also have exposure to movements in the Chinese currency against Sterling. Neptune expects the Chinese Yuan to appreciate over the next few years given the huge trade surpluses that China has accumulated over the last 10 years or so. Remember too, as a Greater China fund, it can also invest up to 20 per cent in Taiwan – another market containing many companies paying good dividends. It is also an interesting play on the development of the two countries. While clearly there has been plenty of animosity over the years, there seems to be an understanding now which is to the advantage of both countries.

The financial crisis has forced China to look at its business model, which had relied heavily on exports to the West. Going forward there will be a far greater emphasis on domestic consumption and on developing the rural economy. In other words China recognises that it needs to grow internally. So the outlook for Chinese stock market, even in the short term, remains promising. Much of the press worries about a bubble, but I believe these fears are overstated. In addition the Chinese authorities are acting to reduce their own huge stimulus package. It seems to me that they are acting prudently, yet the market has been taking fright, which looks to me like a buying opportunity.

This fund will not be as racy as a pure growth fund, but should prove more defensive if markets were to fall. For income investors looking to diversify beyond the UK it is certainly is well worth a closer look.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent