The company’s high turnover strategy of holding inventory for only three to five days on average allows it to react almost immediately to regulatory, macroeconomic or even company-specific events. He typically holds 200-500 shares at any one time.
But with speed comes cost. And this is especially the case in China, which has higher trading fees than countries like Japan or the United States.
“Having a fast quantitative strategy only works in markets where costs are low or where your trades have so much alpha that you can overcome those costs – and that’s where China Market A is right now,” he said. said Mr. Prescott.
Mingshi’s international funds, launched in 2020, provide access to Chinese equity markets through two strategies.
Its Optima fund is a market-neutral strategy designed to perform in all market conditions and posted a gross return of 33.3% for calendar year 2021 in US dollars and before fees.
The company’s long-only Maxima Fund generated gross returns of 19.4% for the same period, compared to 4% for its benchmark MSCI China A Onshore.
However, both funds had a tougher start to 2022. The Optima fund is down 7.8% since the start of the year, while the Maxima strategy has recorded a loss of 12%, but is still ahead of its benchmark by 0.2%.
Mingshi’s top holdings in his Optima fund include Naura Technology Group, United Winners Laser and Yunnan Yuntianhua. The strategy is to overweight industrials and materials, and underweight energy and financials.
With risk comes opportunity
Although some global fund managers have decided to avoid China due to geopolitical risks, Mingshi’s quantitative approach aims to consistently capitalize on the unique qualities of the Chinese A-market.
“The risks of investing in China are undeniably higher than in many developed markets, and anyone saying otherwise is misleading,” Prescott said.
“The regulatory framework and rules that govern the Chinese stock market are still new; the Shanghai Stock Exchange is only 35 years old compared to the New York Stock Exchange which has been around for 250 years.
“Of course, there is greater risk, but with that risk comes opportunity.”
China’s A-share market, which has about 3,500 listings, is dominated by retail investors who account for about 70% of daily transactions. This compares to Australian retail investors, which account for between 10% and 15% of daily turnover.
Australia’s biggest shareholders are institutional investors and pension funds, but in China mom and dad investors own more than 50% of the shares.
“The whole market psychology is different,” Prescott said. “China has a huge amount of liquidity, it’s the second largest market in the world, and it also offers diversification because it’s less correlated to global events than other major markets.”
Although the Australian and US markets have flows of exchange-traded funds (ETFs), these factors have less of an effect on the Chinese market due to its low inclusion in the MSCI indices. China represents around 3.6% of the MSCI All-Country World Index.
But Prescott thinks the optimal asset allocation to China is actually around 38% for a global equity portfolio.
“China was only added to the MSCI five years ago because before that it wasn’t transparent enough, the rules weren’t clear and international access was messy, so there’s had a lot of work to prepare the markets,” he said.
“They weren’t going to put China at 20% exposure right away, so I think there will be a gradual increase in its weighting over the next 10 years to represent China’s positioning in equity markets. global in terms of size and influence.. But adding China in larger weightings than it currently is in the MSCI indices is better for your portfolio from a risk-return perspective.
The short of it
Mingshi also uses short selling of individual stocks in its Optima fund, which Prescott said was “arguably the best opportunity for alpha in global equity markets over the next five years.”
“The only real way to short a single stock is in the offshore market, outside of Hong Kong, and it’s so attractive because it’s very hard to do – it’s expensive, inventory is limited , you need to have good relationships with brokers, and you need a lot of research expertise,” he said.
“And because of these limitations, there aren’t many people. So if you can get the inventory and if you have the strategies, there aren’t a lot of people on your side.
Short selling of individual stocks represents 30% of Optima’s short portfolio, with that target expected to remain in place for the first half of this year. But the company says if offshore inventory availability increases and performance continues to significantly outperform the benchmark, it will consider raising that target ratio.
Another opportunity that Mingshi is trying to capitalize on is that of environmentally focused businesses. Prescott said green stocks in China have outperformed the dirtiest stocks by an average of 16% per year.
“China’s focus on the environment over the past five years is a good strategy, and we think it’s going to be increasingly important because China has very aggressive environmental goals,” Prescott said. .
“It’s often obscured by business and geopolitical headlines, but China’s environmental stock story is going to be very interesting over the next 10 years.”
The “biggest and baddest” market
Mr Prescott, who grew up in Sydney’s mid-west, acquired a particular interest in Asian financial markets after moving to Hong Kong in 2007 for a graduate job at Deutsche Bank, as a derivatives trader .
He spent 12 years in Hong Kong, also working for Citigroup and hedge fund Nezu, before moving to Shanghai to be with his wife.
A chance encounter with a friend of his partner led Prescott to meet Mingshi COO Stephan Zhou and founder Yu Yuan, leading to him joining the company in 2019.
“What drew me to China as a young trader was that it’s the biggest and baddest stock market in the region,” Prescott said.
Headquartered in Shanghai, Prescott believes Mingshi’s greatest advantage is its access to local talent.
“The number of high-quality college and postgraduate graduates coming out of China is immense, especially in science, technology, engineering and mathematics (STEM) fields,” he said. -he declares.
“It’s crazy how much talent is coming out of Chinese universities, so being able to tap into that job market is an incredible advantage for a local onshore company.”