Our core China Index also completed in March its most recent semi-annual reconstitution and rebalance; we had been waiting for its first anniversary as GLCN’s benchmark to report on both its one-year performance and on the latest changes to the Index following the rebalance.
The MarketGrader China All-Cap Growth Leaders Index (MGCNGROW) completed its most recent semi-annual reconstitution and rebalance on Friday, March 19th, replacing 89 of the constituents from the September 2020 class. This represented a constituent-turnover of 44.5%, a hair above its 44% historical average going back to 2008, but well below the 123 constituents it had replaced when it last reshuffled its selection in September 2020 (September rebalances have historically had higher turnovers than March rebalances).
It’s worth mentioning, though, that MGCNGROW doesn’t follow a strategy that pursues short-term returns through very active trading; instead, it focuses on identifying China’s very best companies according to MarketGrader’s GARP lens and holding them for as long as possible, provided their growth is sustained and their valuation doesn’t get too far ahead of the company’s financial results. So, while 89 companies were replaced in March by a new crop of highly rated stocks, the Index currently has 46 companies that have remained on its roster for at least two consecutive years. Sixteen of them have been members of MGCNGROW for at least three years and two, Sunny Optical Technology (2382.HK) and China Medical System Holdings (867.HK) have been in the Index for more than five years. Sunny Optical has been a member of MGCNGROW since September of 2012, gaining 4,386% (in USD price return) since it was first selected to the Index; China Medical Systems, on the other hand, joined MGCNGROW in March 2013 and has since gained 146% in cumulative, price return. These are what we refer to as “Growth Compounders,” and the types of companies the MarketGrader methodology seeks to identify and hold.
MGCNGROW gained 6.5% (price-only, USD) between its September 2020 and March 2021 rebalances, outperforming the CSI All Share Index, which gained just 4% over the period, but trailing the country’s large cap benchmarks, including the CSI 300 Index’s 9.9% gain and MSCI China’s 14.1% rise. As we have written recently, Chinese equity returns became concentrated in the market’s largest stocks last summer, culminating in a market peak in February of 2021 and coinciding with China’s Lunar New Year holiday. Unsurprisingly the country’s small cap benchmark had a -0.2% price return also in the September to March period, underscoring the lack of market breadth as Chinese equities approached a cyclical top.
The 89 companies replaced at MGCNGROW’s most recent rebalance had a six-month average price return of -0.7%, whereas the 111 companies that remained in the Index had an average 4.9% return. So, not only did MGCNGROW start the current six-month period with a fresh set of fundamentally sound companies, but it also kept from the September selection the stocks that seem to have momentum at their back.
May 1st, by the way, marked the one-year anniversary of MGCNGROW as the benchmark for VanEck’s China Growth Leaders ETF (GLCN). Since becoming the fund’s new benchmark, the Index had a USD price return of 41.7%, slightly behind CSI 300’s 42.8% return but well ahead of MSCI China (34.6%), CSI All Share (36.6%) and CSI 500 (32.1%), as may be seen in Figure 1, which also displays the Index’s latest rebalance period returns.
Figure 1. Cumulative Six-Month and 1-Year Price Returns for MGCNGROW vs. Chinese Benchmarks
|Index||Sept. 2020 – March 2021||May 2020 – May 2021|
|MarketGrader China All-Cap Growth Leaders||6.5%||41.7%|
|CSI 300 Index||9.9%||42.8%|
|MSCI China Index||14.1%||34.6%|
|CSI All Share Index||4.0%||36.6%|
|CSI 500 Index||-0.2%||32.1%|
Three sector trends stood out following MGCNGROW’s latest rebalance. First, the Industrials sector continues to be, based on the number of constituents regularly selected to the Index, the single strongest sector from a bottom-up perspective. The sector once again reached its 40-count (20%) cap, as defined in the Index rules, as had been the case during the September 2020 rebalance. In fact, in the 28 semi-annual selections MarketGrader has recorded for MGCNGROW dating back to its base date in December 2007, there have only been six occasions when Industrials have not reached their 40-count cap. The lowest count came in the September 2013 selection, when MarketGrader selected only 28 Industrials to the Index. Going back to its inception the average count has been, in fact, 39 companies selected from the Industrials sector every six months. To be fair, though, Industrials is by far the sector with the most companies among all of China’s public companies, with approximately 33% of the total count based on MarketGrader’s coverage. Nevertheless, the fact that the sector seems to reach its cap at almost every Index rebalance underscores the strength in China’s very large manufacturing base.
The second notable trend is the resurgence of the consumer in China, with the Consumer Discretionary sector gaining a net eight names, from 13 selected in September, to 21. This is still below the sector’s historical average of 30 stocks per selection, but trending in the right direction. Additionally, we like to look at the broader “new economy” sector complex, where MarketGrader also includes Consumer Staples, Health Care and Technology. All four of these sectors, taken together, account for almost 57% of the Index’s constituents.
Lastly, the big loser from a sector perspective was Materials, which lost a net 15 names, going from 36 selections in September to 21 selections in this most recent rebalance. This puts Materials below its average of 25 names selected per rebalance. Figure 2 shows all changes made by MGCNGROW during its March rebalance relative to the September constituents and in the context of each sector’s historical averages.
It’s worth noting that Financials, which accounts for only 7.6% of MGCNGROW’s weight, is usually the sector with the largest weight among Chinese benchmarks. It currently accounts for 29% of the weight of CSI 300 and almost 19% of the weight of MSCI China. In other words, MarketGrader has for a long time placed an implicit underweight bet on the sector based purely on our bottom-up selection methodology.
Figure 2. Changes in Company Selections by Sector for MGCNGROW during its March 2021 Rebalance
|September 2020||March 2021||Net Gain or Loss||Historical Average|
Thirty-six companies were selected to MGCNGROW for the first time ever in March, with the five largest being China Feihe Limited (Consumer Staples, MG Score = 72.0), Evergrande Property Services Group (Financials, MG Score = 74.9), China Galaxy Securities (Financials, MG Score = 65.5), Pop Mart International (Consumer Discretionary, MG Score = 74.6), and CSC Financial (Financials, MG Score = 74.7). Our favorite list of stocks within MGCNGROW is one we refer to as “Growth Compounders.” These are companies that have been perennial members of the Index as they seem to get selected repeatedly regardless of underlying economic and market conditions. These companies score among the best in MarketGrader’s coverage regularly and form the backbone of the Index. We usually like to highlight the top 30, based on the number of times they have been selected to the Index. The list appears in Figure 3.
Figure 3. The 30 Companies with the Most Historical Selections to MGCNGROW
|700.HK||Tencent Holdings Ltd.||27|
|000568.CN||Luzhou Laojiao Company Limited Class A||22|
|000858.CN||Wuliangye Yibin Co., Ltd. Class A||22|
|2382.HK||Sunny Optical Technology (Group) Co., Ltd.||18|
|867.HK||China Medical System Holdings Ltd.||17|
|600809.CN||Shanxi Xinghuacun Fen Wine Factory Co. Ltd. Class A||17|
|000895.CN||Henan Shuanghui Investment & Development Co., Ltd. Class A||15|
|600406.CN||NARI Technology Co., Ltd. Class A||15|
|000999.CN||China Resources Sanjiu Medical & Pharmaceutical Co., Ltd. Class A||14|
|002001.CN||Zhejiang NHU Co. Ltd. Class A||14|
|600031.CN||Sany Heavy Industry Co., Ltd. Class A||13|
|000661.CN||Changchun High & New Technology Industry (Group) Inc. Class A||12|
|ATHM||Autohome, Inc. Sponsored ADR Class A||12|
|600585.CN||Anhui Conch Cement Company Limited Class A||12|
|603288.CN||Foshan Haitian Flavouring & Food Co., Ltd. Class A||12|
|000157.CN||Zoomlion Heavy Industry Science & Technology Co. Ltd. Class A||12|
|BABA||Alibaba Group Holding Ltd. Sponsored ADR||11|
|002154.CN||Baoxiniao Holding Co Ltd Class A||11|
|600486.CN||Jiangsu Yangnong Chemical Co. Ltd. Class A||11|
|151.HK||Want Want China Holdings Limited||11|
|600449.CN||Ningxia Building Materials Group Co., Ltd. Class A||10|
|600779.CN||Sichuan Swellfun Co., Ltd. Class A||10|
|600658.CN||Beijing Electronic Zone High-tech Group Co., Ltd Class A||9|
|000672.CN||Gansu Shangfeng Cement Co., Ltd. Class A||9|
|000789.CN||Jiangxi Wannianqing Cement Co., Ltd. Class A||9|
|002022.CN||Shanghai Kehua Bio-Engineering Co., Ltd. Class A||9|
|603899.CN||Shanghai M&G Stationery, Inc.||9|
|968.HK||Xinyi Solar Holdings Ltd.||9|
|600720.CN||Gansu Qilianshan Cement Group Co., Ltd. Class A||8|
|600801.CN||Huaxin Cement Co., Ltd. Class A||8|